Trading Order Blocks

What is an Order Block?

Order blocks or often referred to as Institutional Order Blocks are a defined area where large buyers or sellers of smart or institutional money entered the market and move price away from a consolidation zone to a new area of interest, this strategy of trading is heavily based around the economic theory of supply and demand. Financial markets are engineer by smart money by means of creating levels of interest with in the market to use at a later date.

The same theory applies to the likes of support and resistance, as these levels gives traders and investors an idea of a safe area or level to enter and exit the market based on the previous consensus of other traders. This type of strategy can be quite attractive to professional traders for a few reasons, firstly the theory, is you have the big money on your side instead of being caught up in the short term noise and patterns created by emotional retail traders. Secondly often this type of strategy can offer significant Risk to Reward ratios, due to precision entries and rather small stop losses and the ability to let the trade run for a long time in the new direction of the market trend.

How to Identify Order Blocks?

An order block can be identified by specific candlesticks or price action that when properly viewed in an institutional context, can highlight smart money buying or selling at a specific level. These levels are normally prominent after a period of consolidation when price is held within a tight range. When the price is eventually moved from this range with a considerable increase in volume, this is where we can identify the order block in place, due to the fact it would have required a large amount of money to move from this range or create the imbalance of the supply and demand equilibrium. A break up from a consolidation is known as a Demand Zone and id we break down it is known as a Supply Zone.

Identifying a Demand Zone

When you locate an area of tight consolidation or equilibrium of supply and demand, you can identify the demand zone by locating the last bearish candle before the market moved out of this consolidation level. Ideally you want to see an increase in volume on this rally or move out of the range, to confirm momentum may be on your side.
When price retests this level shortly after and has a bullish reaction, this confirms the Demand level is strong/large or of high quality and you can enter the market with confidence that the big money is on your side. Often price will return to these demand levels over time and can be targets when entering short positions from above, or simply looking for new entries for a long position on a bounce. Its worth noting that if these demand levels are penetrated or broken through at a later date, it is to be considered invalidated and no longer in place.

Identifying a Supply Zone

If you locate an area of consolidation, you can identify the supply zone by locating the last bullish candle before the market moved down from this area with momentum or conviction. When price retests this level shortly after and has a bearish reaction, this confirms the Supply level is strong/large or of high quality and you can enter the market with confidence that the majority is on you side.

Often price will return to these supply levels over time and can be targets when entering long positions from below or looking to open new short positions if price rejects once again. Again Its worth noting that if the supply level is penetrated or broken through at a later date, it is to be considered invalidated and no longer in place.

How to trade an Order Block?

There are multiple ways to trade using order blocks and you don’t need to purely use the supply and demand strategy for both entries and exits but you may wish to consider them in your current strategy as potential areas of interest for managing your trade. For example you may use an entirely different strategy for entering the market but may consider a supply zone as a good area to exit your position or take partial profit to reduce risk.

In theory you can trade order blocks on any time frame, how ever the strength and expected move are always going to be relative to the time frame your trading. For example, using an order block strategy on the 15min time frame may produce a small 2% move in a short time period, how ever the order block can quiet easily be broken shortly after and would still come with considerable risk due to the volatility of shorter time frames often referred to as noise, this noise will trigger multiple false signals and lower the probability of your win rate substantially. An order block on the 4hr or daily however, may produce a 10-50%+ move over a longer period of time, and that level will probably hold up strong and be relative, time and time again as most professional traders will use these time frames for confirmation. I’m going to show you the basics of how I trade solely using a supply and demand strategy below.

Trading Demand

Once you have identified a strong level of demand you can enter long from the bullish confirmation bounce or retest on that level. If you are going to use the Supply & Demand strategy, then locating the previous supply level will be your target. Your stop loss price will normally be placed under the demand level as the demand zone acts like a defensive barrier for your position. Some people may chose to place there stop tight with in the consolidation range. Personally I have found my win rate significantly drop using that strategy due to being stopped out often when the trade was still good, so I adapted by giving my stop loss some more breathing room and saw my win rate rise. If price happens to push through demand and hit your stop loss, the demand level has been invalidated and the trade will most likely not play out anyway.

Trading Supply

Once you have identified a strong level of Supply you can enter Short from the bearish confirmation rejection or retest on that level. You can locate the previous demand level as your target. Your stop loss price will normally be placed above the supply level as the supply block acts like a defensive barrier for your position. If price happens to push through supply and hit your stop loss, the supply level has been invalidated and its time to move on.

Like any strategy I suggest you practice and back test to see if it suits your tolerance or is maybe something you can use as an addition to your current strategy. I hope this tutorial has been helpful and if you have any questions, just reach out on my socials.