Order Blocks: A Deeper Dive

Understanding Order Blocks in Trading

Order blocks are an essential concept in trading, particularly for those who use institutional trading strategies. They can help traders identify key levels in the market where significant buying or selling activity is likely to occur, providing valuable insights for making trading decisions. This educational post will explain what order blocks are, why they matter, how traders can use them, and how to identify and handle potential manipulations around these areas.

What Are Order Blocks?

An order block is a price level or zone on a chart where large institutions or big players have placed significant buy or sell orders. These orders create a high concentration of trading activity at these levels, which can lead to a strong reaction in price when revisited.

Why Order Blocks Matter

Market Influence: Order blocks reflect the actions of big market participants, such as banks and hedge funds. These players have the power to move the market, so identifying where they are active can give traders an edge.

Predictive Power: Because large orders are placed at these levels, the price is likely to react when it revisits an order block, making them useful for predicting future price movements.

Support and Resistance: Order blocks can act as strong support or resistance levels, depending on whether they are associated with buying or selling activity.

Characteristics of Order Blocks:

High Volume

‍Order blocks are usually associated with large trading volumes because institutional traders place substantial orders at these levels.

‍Price Consolidation

‍Order blocks often form in areas where the price consolidates before a significant move, indicating accumulation or distribution by large players.

Market Reversals

‍When the price returns to an order block, it often leads to a reversal or strong movement in the opposite direction.

How to Identify Order Blocks

Simple Version

Read More in This Educational Article

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Intermediate Version

Historical Price Zones: Look for areas on the chart where the price consolidated before making a sharp move. These are often where order blocks are formed.

Volume Analysis: Order blocks are typically associated with high trading volumes. Identifying spikes in volume can help pinpoint these levels.

Candlestick Patterns: Specific candlestick patterns, such as engulfing patterns or pin bars, in areas of consolidation can also indicate the presence of an order block.

Smart Money Concept Version

Standard Bullish Order Block

Standard Bullish Order Block: is the last down-moving candle that is followed by a rapid upward price movement within the next 1-3 candles. A clear imbalance is created when the price moves up. Momentum should be seen. Draw the order block from the candle High to Low.

Standard Bearish Order Block

Standard Bearish Order Block: is the last up-moving candle that is followed by a rapid downward price movement within the next 1-3 candles. A clear imbalance is created when the price drops. Momentum should be seen. Draw the order block from the candle High to Low.

Trend Order Block

Bullish Trend Order Block

A Bullish Trend Order Block is identified through a series of price actions that suggest the market is poised for an upward reversal. Like with the bearish block, the Break of Structure (SMS/BMS) must occur within 3-4 candles to confirm strong bullish momentum.

1. Formation of a Higher Low (HL):
   • The process begins by spotting a higher low in the price action, indicating that buyers are starting to gain control and that the market could be transitioning into an uptrend.
2. Break of Structure (SMS/BMS):
   • After the formation of the higher low, the price needs to break the previous high within the next 3-4 candles. This quick break of structure is crucial as it demonstrates strong bullish momentum, confirming that the market is shifting upward. If the SMS/BMS occurs within this candle count, the Bullish Order Block becomes valid.
3. Last Down Candle:
   • The Bullish Order Block is formed at the last down candle before the price begins its upward move. This candle is significant because it represents the final attempt by sellers to push the price lower before buyers take control. The order block usually extends from the close of this last down candle to the close of the next bullish candle.
4. Entry at Retest:
   • After identifying the Bullish Order Block, wait for a retest of this zone. The price often retraces back to this order block before continuing its upward move. This retest provides a low-risk entry into a long position, as it confirms the strength of the order block as a support area.

Bearish Trend Order Block

A Bearish Trend Order Block is identified by following a specific sequence of price movements that indicate the potential for a downward reversal in the market. It's crucial to ensure that the Break of Structure (SMS/BMS) happens within 3-4 candles after the lower high is formed to confirm strong market momentum.

1. Formation of a Lower High (LH):
   • The process begins with identifying a lower high in the price action, which suggests that sellers are gaining control and that the market may be transitioning into a downtrend.
2. Break of Structure (SMS/BMS):
   • Following the formation of the lower high, the price must break the previous low within the next 3-4 candles. This quick break of structure is essential as it indicates high momentum in the market, confirming that the trend is turning bearish. If the SMS/BMS occurs within this candle count, the Bearish Order Block becomes valid.
3. Last Up Candle:
   • The Bearish Order Block is formed at the last up candle before the market begins its downward move. This specific candle represents the final effort by buyers to push the price higher before sellers take control. The order block is typically identified from the close of this last up candle to the close of the next bearish candle.
4. Entry at Retest:
   • After identifying the Bearish Order Block, watch for a retest of this zone. The price often retraces back to this order block before continuing its downward move. This retest offers a low-risk entry into a short position, as it confirms the strength of the order block as a resistance area.

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‍Sweep Reversal Order Block

Bullish Sweep Reversal Order Block

A Bullish Sweep Reversal Order Block is identified by observing a sequence of price actions: a sweep of an internal low, respect of a key level, formation of the last down candle (which becomes the order block).

1. Internal Low:
   • The first step is to identify an internal low in the price action. This is a point where the price has dipped and formed a temporary low within the overall structure.
2. Sweeps Low:
   • Next, the price action "sweeps" or breaks below the internal low. This means that the price briefly moves lower, taking out the stop losses or liquidity resting below this internal low. This sweep is a critical step because it indicates that the market has cleared out weak positions and gathered liquidity for a potential reversal.
3. Respects the Key Level:
   • After sweeping the internal low, the price respects or holds above a key level of support. This key level serves as a foundation, indicating that the market is not willing to push the price lower. It's crucial because it shows that buyers are stepping in to support the price at this level.
4. Formation of the Bullish Order Block:
   • The Bullish Order Block is formed at the last down candle before the price starts moving upward. This specific candle is important because it represents the final attempt by sellers to push the price lower before buyers take control. The order block typically extends from the open of this last down candle to the high of the next bullish (green) candle. The reason this candle is significant is that it often represents a zone where large institutional orders were placed, and hence, it becomes a potential area of support in the future.
5. Entry at Retest:
   • Once the Bullish Order Block is identified, the next step is to wait for a retest of this zone. The price typically returns to this order block, and this retest offers an opportunity for a low-risk entry. If the order block holds, it suggests that the area remains a strong zone of support, making it a good place to enter a long position.

Bearish Sweep Reversal Order Block

A Bearish Sweep Reversal Order Block is identified by observing a sequence of price actions: a sweep of an internal high, respect of a key resistance level, formation of the last up candle (which becomes the order block).

1. Internal High:
   • The first step is to identify an internal high in the price action. This is a point where the price has risen and formed a temporary high within the overall structure.
2. Sweeps High:
   • Next, the price action "sweeps" or breaks above the internal high. This means that the price briefly moves higher, taking out the stop losses or liquidity resting above this internal high. This sweep is critical because it indicates that the market has cleared out weak positions (shorts) and gathered liquidity for a potential reversal to the downside.
3. Respects the Key Level:
   • After sweeping the internal high, the price respects or holds below a key level of resistance. This key level serves as a ceiling, indicating that the market is not willing to push the price higher. It's crucial because it shows that sellers are stepping in to push the price down at this level.
4. Formation of the Bearish Order Block:
   • The Bearish Order Block is formed at the last up candle before the price starts moving downward. This specific candle is important because it represents the final attempt by buyers to push the price higher before sellers take control. The order block typically extends from the open of this last up candle to the low of the next bearish (red) candle. This candle is significant because it often represents a zone where large institutional orders were placed, and hence, it becomes a potential area of resistance in the future.
5. Entry at Retest:
   • Once the Bearish Order Block is identified, the next step is to wait for a retest of this zone. The price typically returns to this order block, and this retest offers an opportunity for a low-risk entry. If the order block holds, it suggests that the area remains a strong zone of resistance, making it a good place to enter a short position.

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Advanced Insights about Order Blocks

Source of Liquidity: Order blocks represent areas of high liquidity. This is because large institutional orders are placed/exectued at these levels, providing the market with a substantial supply or demand. The presence of these large orders means there is sufficient liquidity to absorb price movements, which helps stabilize the market temporarily.

Lower Volatility at Order Blocks: Due to the increased liquidity at order blocks, volatility tends to be lower when the price is within these zones. The large orders absorb smaller market orders, preventing wild price swings and creating a more stable trading environment. This stability is temporary and often lasts until the order block is fully absorbed.

Price Stability and Absorption Time: It typically takes some time for the market to absorb all the orders within an order block. During this period, the price may hover around the order block with limited movement, reflecting the ongoing battle between supply and demand. This period of price stability continues until the liquidity at the order block is exhausted.

Potential for Significant Price Movement Post-Absorption:Once the orders within an order block are fully absorbed, the market may experience a sudden increase in volatility and directional movement. For a bullish order block, this could mean a strong upward movement as the selling pressure is absorbed. For a bearish order block, it could lead to a sharp decline as buying pressure diminishes. The price is then free to "take off" in the direction of the prevailing trend once the liquidity provided by the order block has been fully utilized​.

Is the idea that an order block is fully executed within a single candle accurate, or is it an oversimplification of how institutional trading actually works?

The idea that an order block can be fully executed within a single candle is often taught in trading education, including in some of ICT's teachings. However, this concept can be misleading and overly simplistic when we consider the complexities of institutional trading and market dynamics.

Institutional traders typically manage large orders using sophisticated strategies that spread the execution over time and across different venues to avoid revealing their full intentions to the market. This means that the absorption of an order block usually doesn't happen within a single candle but rather over a more extended period, involving multiple trades and even different trading platforms.

By focusing on a single candle, traders might miss the broader context of how these large orders are executed and how the market absorbs them. It's crucial to understand that the real process involves more complexity, including phases of price consolidation and the subsequent reaction of the market once the order block is fully absorbed.

In summary, while the single-candle concept might serve as a useful simplification for educational purposes, it's important to recognize that it doesn't fully reflect the intricate realities of how institutional trading operates.

Why the "Single Candle" Execution Concept is Flawed

1. Market Realities:
   • Institutional Order Execution: Large institutional orders typically cannot be executed within a single candle, especially if the order size is significant relative to the liquidity available in the market. Institutions often break up large orders into smaller chunks, executing them over time to avoid moving the market too much and to minimize slippage. The idea that an entire "order block" of institutional orders could be executed in one single candle ignores these practical aspects of large-scale trading.
2. Order Absorption:
   • Multiple Candles and Timeframes: In reality, an area of order flow or accumulation (what might be conceptualized as an order block) would likely unfold over multiple candles and potentially across different timeframes. A single candle might show a strong move, but this move could be the result of a culmination of smaller orders being filled over a period of time, rather than one massive order being executed all at once.
3. Price Action Interpretation:
   • Simplification Issues: Teaching that a significant institutional order can be executed in a single candle oversimplifies the complexities of price action. Price movement is the result of ongoing interaction between buyers and sellers, with orders being placed and filled continuously. It is more realistic to view these zones (order blocks) as areas where institutional interest is concentrated rather than as a single point in time represented by one candle.

The Danger of Oversimplification

Teaching that an entire institutional order block can be executed in one candle can lead to several problems for traders:

• False Expectations: Traders may develop unrealistic expectations about how the market operates, believing that they can precisely identify and capitalize on institutional activity based on single-candle patterns. This could lead to poor decision-making and trading losses.
• Risk of Misinterpretation: By focusing on single candles, traders might misinterpret the broader context of market activity, missing out on important signals from higher timeframes or ignoring the market’s liquidity structure.

Conclusion

The idea that an entire order block could be executed within a single candle is overly simplistic and does not reflect the realities of how large institutional orders are typically handled in the market. This misconception can lead to traders developing unrealistic expectations and making poor trading decisions. A more nuanced understanding of market dynamics and institutional order flow is necessary for effective trading. Recognizing the limitations of single-candle analysis and focusing on broader market context will lead to a more accurate and effective approach to trading.

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More Resources about institutional trading

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Understanding Dark Pools‍
Trade Like the Pros in Dark Pools‍
Hidden Order Blocks
Institutional Trading

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