Order blocks represent the chunk of market orders which shows the high buying and selling activity on a certain price level. This activity is proof of the presence of order blocks.
Order blocks show that the market makers have placed orders at this price level. In short, these market orders are footprints, and we can use them in technical analysis to trade with institutional traders.
I will explain the order blocks from A to Z in this article with a trading strategy. So make sure to read the full article.
How to find order blocks on the candlestick chart?
There is a simple criterion to determine the presence of order blocks on the chart.
- First, find the ranging market structure on the chart. It shows that market makers are in the decision phase, and the market is about to decide on a direction.
- After the ranging market structure, a big impulsive wave will form, breaking the ranging market structure. This impulsive wave is the result of the presence of a chunk of market orders.
- We can identify the order blocks when these two waves form on the chart.
Order block zone
In the previous step, we learned to identify the order block; now, I will explain how to draw an order block zone. So, we can trade these high-probability price levels.
- First, find the high and low of the ranging market wave. Then draw a zone using the high and low of the ranging wave.
- The highs and lows and upper and lower limits. We can use these limits to open a trade and to stop the loss level.
Types of order blocks
Based on bullish and bearish impulsive waves, the order blocks are categorized into two types.
- Bullish order block
- Bearish order block
The ranging market wave will remain the same for both types. Only the breakout and impulsive wave determines the bullish or bearish order block.
Bullish order block
A bullish order block forms if the impulsive wave breaks the ranging structure in a bullish direction.
Bearish order block
If the impulsive wave breaks the ranging structure in a bearish direction, then a bearish order block forms.
Significance of order blocks
In the technical analysis, traders forecast the market using repetitive price patterns. An order block is one of the repetitive patterns created due to the opening of a chuck of orders. And these orders tell retail traders that institutional traders are trading.
When we know the presence of order blocks at certain price areas, it is evident that price area is essential for institutional traders. And we can trade in that price area to get a high probability trade setup.
In this way, we can find high-probability trades using order blocks.
Now let me explain a simple trading strategy using order blocks to make this price pattern easier to trade.
The order blocks trading strategy.
In the trading strategy, I have used the confluence of engulfing candlestick patterns and order block zones.
A bullish order block is a signal of buying from the OB zone, while a bearish order block is a signal of selling from the zone. However, if we add a confluence of candlestick patterns, the probability of winning will increase.
Confluence is the alignment of two parameters. For example, the bullish order block and the bullish engulfing forecast are the same. So if both patterns form at a certain price level, then the validity of that key level will increase.
And trading is a game of probabilities
Here are the requirements for opening a buy or sell order.
Open a buy order
To open a buy order, first find a bullish order block. After the formation of a bullish OB, the price will retrace, and at the end of retracement, a bullish engulfing pattern will form. This pattern will form at the OB zone.
Now open a buy order and place stop loss below the lower limit of the zone or below the low of engulfing candlestick. Choosing the safest option while fixing the stop loss level would be best.
Open a sell order
I have used the bearish order block and bearish engulfing candlestick pattern for the bearish pattern.
Open a sell order in mt4 or mt5 when a bearish engulfing candlestick forms at the bearish order block after a retracement. Place the stop loss above the high zone of the candlestick.
The bottom line
In conclusion, the order block pattern is an advanced technical tool to determine institutional price levels. The institutional activity on the price chart reveals much information. We must use this information in technical analysis to increase the probability of winning.
I recommend checking this order block indicator if you want to automate most of the trading work.