Simple Order Blocks

Understanding Simple Bullish and Bearish Order Blocks in Trading

Order blocks are key concepts in trading that can help you identify important levels where the price of an asset might reverse or continue its trend. These levels are often associated with the activities of large institutional traders, who have the power to influence the market significantly. Let’s break down what bullish and bearish order blocks are, how to identify them, and how they can be useful in your trading strategy.

What Is a Bullish Order Block?

A Bullish Order Block is the last down (bearish) candle before the price makes a significant upward move. This down candle is important because it represents the point where large institutional traders may have accumulated their buy positions. When the price returns to this level in the future, it often finds support, leading to a potential bounce back up.

Key Points:

• Last Down Candle: Look for the final red (down) candle before a strong upward price movement.
• Potential Support Level: This candle’s range can act as a support level when the price revisits it.

What Is a Bearish Order Block?

A Bearish Order Block is the last up (bullish) candle before the price makes a significant downward move. This up candle signifies the point where large institutional traders may have started to sell off their positions. When the price returns to this level, it often encounters resistance and may reverse downward.

Key Points:

• Last Up Candle: Identify the final green (up) candle before a sharp downward price movement.
• Potential Resistance Level: This candle’s range can act as a resistance level when the price revisits it.

Simplified Explanation:

• Bullish Order Block: The last down candle before the price shoots up.
• Bearish Order Block: The last up candle before the price drops down.

How to Identify Them:

1. Look for Significant Moves: Identify areas on the chart where the price made a strong upward or downward move. These moves are often initiated by institutions placing large orders.
2. Identify the Last Opposite Candle: For a bullish order block, find the last down candle before the upward move. For a bearish order block, find the last up candle before the downward move.
3. Mark the Candle's Range: Draw a horizontal line or zone across the body of this candle (from the open to the close). This marks your potential order block level.
4. Wait for a Retest: Watch for the price to return to this order block. If it does and shows signs of reversing, this can be a signal to enter a trade.

Understanding these order blocks helps traders anticipate where the price might reverse or continue its trend based on the actions of institutional traders.

A Note on the Simplified Order Block Concept

I, Zeiierman, want to emphasize that the explanation provided above is a very simplified version of the order block concept. While this simplified version is a good starting point for new traders who want to learn about how order blocks work and function, it's important to understand that this is not a complete or fully accurate depiction of how the financial markets operate.

Reservations About the Order Block Concept

I, Zeiierman, do not fully endorse the order block concept as it is commonly presented in online forums and educational courses for retail traders. The popularity of this concept in recent years does not necessarily validate its accuracy or correctness. It is essential to recognize that the order block concept is largely based on assumptions rather than a precise understanding of market mechanics.

Why the Order Block Concept is Misleading

1. Institutional Order Execution: Large institutions and traders typically do not execute their significant orders on public exchanges where retail traders can observe them. Instead, they utilize dark pools, private exchanges that allow them to place large orders without revealing their intentions to the broader market.
2. Hidden Orders: Institutions can also use hidden orders that are not visible in the public order book, making it impossible for retail traders to see where these large trades are being executed.‍
3. Sophisticated Execution Models: When institutions execute large orders in the market, they often employ sophisticated execution models and algorithms designed to minimize market impact and reduce slippage. These models break down large orders into smaller, incremental trades that are executed over time, across various venues, and sometimes even through different third-party liquidity providers. This strategic and fragmented execution process makes it exceedingly difficult to detect the full scope of their trading activities on a standard price chart.‍
4. Third-Party Routing: Institutions often route their orders through third-party liquidity providers, further obscuring the true nature of their trading activities. As a result, without access to specific data like order blocks, market depth, and dark pool orders, it's challenging—if not impossible—to accurately identify where these large orders are placed.

Final Thoughts

While the concept of order blocks is still used in many trading strategies and can be valid within those frameworks, it's crucial to approach it with a critical mindset. Understand that what is often presented as an order block in retail trading circles might not reflect the actual behavior of institutional traders. Instead, it is a simplified model that may or may not align with real market dynamics.

For traders, this means that while order blocks can be a useful tool, they should be used in conjunction with other market analysis techniques and a comprehensive understanding of market structure. Always remain skeptical of any concept that claims to pinpoint the actions of institutional traders without access to the necessary data and tools that those institutions use.