In the last few years, the concept of order blocks has exploded, with many traders wondering what they are and how to use them when trading.
So, what are they then?
In short: order blocks are a powerful type of supply and demand zone.
Compared to normal zones, order blocks have a MUCH higher probability of causing a reversal. They also form in differently; rather than develop from a two or three candle base, they ONLY form from a tight range consolidation, making them a lot rarer than typical S & D zones.
Order blocks are a foreign concept to most traders.
So today, let’s fix that…
In this post, I’ll give you a complete rundown of order blocks. You’ll learn why order blocks form, how to identify and draw them, and a few ways to trade the blocks.
Sound good? Let’s dive in…
What Are Order Blocks And How Do They Form?
Order blocks describe a supply and demand zone created when banks use a block order to enter a signfcant trading position.
For order flow traders, block orders probably sound familar.
Block orders are special buy or sell orders the banks sometimes use to enter positions. When the banks have a large position to place, they don’t want to upset price – the position could trigger a big move and execute their trades at worse prices, resulting in lower profits.
To avoid this, they use block orders to split their positions up and get them placed in smaller, more manageable blocks.
Order Block Theory: Why The Banks Use Block Orders
Let’s say a JP Morgan wants to buy 200 million worth of Eur/Usd, but only 50 million is being sold.
Obviously, JP Morgan can’t place this order; not enough people are selling. If they buy now, when only 50 million is being sold, only part of their position (50 million) will get executed… the remaining 150 million will get filled at ever-increasing prices – lowering their overall profit and causing them a big headache.
So, they decide to use a block order to break the position up and get it placed in a more manageable way.
By breaking their position up – let’s say into 20 million chucks – they can place it without upsetting the price too much.
For example, their first 20 million order would get matched with the 50 million being sold. That wouldn’t cause a sudden up-move – upsetting price – because the sell orders are still bigger than the buy orders – 20 million vs 50 million. They can then wait for the orders to pick up again before entering their next chunk.
That process – of placing one 20 million order, then another, and another, etc – results in a supply or demand zone forming, specifically, a zone from a tight range consolidation.
Here’s what your typical order-block looks like – seen one of these before?
Notice the zone forms when price shoots away from a tight range consolidation – a consolation contained within a small price range?
Because of how they work, order-blocks creates these consolidations.
The banks use block orders to enter a large position without upsetting price. How’d they do that? By placing smaller positions around similar prices. That achieves the same effect of placing a single large position albeit using smaller positions instead.
The banks placing positions around similar prices causes a tight range consolidation to form; each position creates a high (or low if they’re shorting) of the consolidation.
Before we move on, here’s a quick summary of order blocks:
Order blocks are supply and demand zones but of a different type.
They form from the banks buying or selling using a block order, which splits a big position (e.g a trade) into a bunch of smaller positions. That makes it easier for the banks to buy/sell without upsetting the price.
Structurally, order blocks are similar to normal supply and demand zones. However, they ONLY form when price moves away from a tight range consolidation that acts as a base. That’s because a block order enters big position means placing smaller positions at similar prices, creating a consolidation with a small range.
How Order Blocks Are Different To Normal Supply And Demand Zones
So, we know order blocks are supply and demand zones – just a different type. The question now is… how do they differ from the normal zones?
Really, there are two key differences…
First: Order blocks outperform standard supply and demand zones.
And that’s regardless of where or when they form – if an order block forms after a long rise or decline – which increases the probability of normal zones resulting in a reversal.
The reason why is because the zones are created from the banks buying or selling using a block order, which they only use when they have an especially large position to place. If they’re placing a big position, the banks obviously don’t want price to break beyond the point they bought or sold – the S or D zone.
Therefore, the zone has a high probability of causing a reversal because the banks wouldn’t place a big position unless they were very confident price was heading in the direction they want.
The other difference, how order block zones form.
In general, order blocks form identically to normal supply and demand zones – they form from a sharp rise or decline away from a base like all zones do.
However, the base ALWAYS a tight range consolidation, like you see below.
Unlike normal zones created from a reversal – which you can also see above – order blocks always form from price moving away from a tight range consolidation. Because that’s the structure that forms when the banks use a block order to place their positions into the market.
The block order enters each position at a similar price, causing the highs of the consolidation to form at almost equal prices. The result?
A tight range consolidation, as you see above.
So to identify order blocks: Look for a tight range consolidation with almost equal highs and lows. They only form from the banks using block orders, meaning a zone MUST exist at the source.
How To Find And Use Order Blocks In Your Trading
Use order-blocks as a high probability setup alongside your main trading strategy. The zones don’t appear often enough for a single strategy.
As a side setup, however, the zones can provide high probability trade signals to generate additional profit alongside your core strategy. That’s how I use them, and I reccomend you the same. Supply and demand remains my core strategy, but I have two or three setups I look for alongside…
Order blocks, pin bars, and the reversal pattern in my book.
Using these patterns together allows me to make more money and lower my risk – due to the diversification they provide to my main trading strategy.
So, how do you find and use order blocks in your trading?
Since order blocks are essentially supply and demand zones – just a much rarer type – the way you trade the zones is the same as how you trade them normally:
You mark a zone on the chart…
Wait for price to enter and provide some sort of confirmation signal – pin bar, engulfing candle, large range candle.
And then place a stop on the other side of the zone and see if price moves away.
Finding the zones is a little more difficult, but still simple with a bit of practice.
The key thing to remember: Look for a zone that forms from a consolidation created by a tight range, i.e price rising and falling between two close prices. These consolidations ONLY form from the banks placing a block order, so an order block must exist at the source and create a supply or demand zone.
Let’s go through some examples…
So, here’s what your typical order-block zone looks like.
This demand zone forms from a sharp move away from a tight range consolidation. Price moves back and forth between 1.21600 and 1.22000 before breaking higher, forming the order block.
Pay attention to what this consolidation looks like, how tight it is.
It’s not your typical consolidation where price makes big swings up and down with each ending at different prices. Instead, the swings are small and terminate roughly at the same points, leading to price being contained within this really tight range that looks almost like a rectangle.
These are the sorts of consolidation you need to look for to find order blocks.
Here’s another one, this time from the 15 minute chart.
Take a look at the consolidation; it’s compact, tightly packed, and almost takes the form of a rectangle.
Since we know that these can only originate from the banks using block order, an order block zone must exist at the source.
Sometimes, the consolidation will form after a move rather than at a swing low or high.
In these cases, draw the order block zone from the most recent swing low/high up to the consolidation. That’ll make it a valid zone. This happens when the banks place a position, creating the initial move – a rise in our case, which itself is a demand zone – then use a block order to place the remaining positions at a slightly higher price.
Your Top Order Block Answered!
Before we wrap up, here are some quick answers to the most common questions traders have about order blocks.
Q: What Is Meant By Order Block Imbalance?
A: Order block imblance refers to the rapid spike or fall in price caused by banks entering via block orders.
The order imbalance causes the rise/fall and produces the order block zone. The same thing happens with regular S&D zones, just through the use of standard orders rather than block orders. The imblance between orders creates the zone.
Q: Is There An MT4/5 Indicator That Can Find Order Blocks For Me?
A: Yes, but they’re a waste of time.
Orderblock indicators, like traditional S&D indicators, have trouble identifying the correct zones. These indicators usually locate regular supply and demand zones rather than order blocks. These zones can still provide decent entries, but they’re not order blocks.
Q: What Is Order Block Theory?
A: Order block theory states institutional traders use block orders to enter trades. It’s a theory because no one knows (for sure) how the banks enter.
Numerous studies and papers, however, have confirmed the banks use of block orders. Their activity is just hidden from view in the order book because of order splitting.
Q: Who Inveted Order Blocks?
A: Technically speaking, no one.
Block orders have been around for decades, but upto now no one could decipher the price action they generate – which, I suppose, is the whole point. Having said that, youtube trader ICT did, at least in name, invent the order block concept.
Q: What’s The Best Timeframe For Trading Order Blocks?
A: Because order blocks form on all timeframes, there is no “best” TF.
I typically trade them on the 1 hour chart because that is my primary trading time frame. They form on lower timescales as well, though their probability decreases slightly as their frequency increases.
Well, I hope this post has helped you understand order blocks a little better.
Order blocks, as I mentioned, make a great setup to watch for in addition to your main strategy; that is how I use them. Additionally, you can trade them at a slightly larger size because they have a much higher likelihood of causing a reversal than typical supply and demand zones. Neat, huh?