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Order blocks – a hidden secret of trading

The concept of order blocks is very important to make consistent profits from market where we can follow the institutions positions. Here in this article we will decode the order blocks where many traders wondering what they are and how to use them when trading.

What are order blocks?

In short words: order blocks are a powerful type of supply and demand zone.

Order blocks pack a serious punch of orders when it comes to triggering reversals – way more than your average zones. Plus, they’re unique little power points, forming exclusively from tight range consolidations instead of a two or three candle base.

Order blocks are based on supply Demand concepts but they pretty rare compared to your standard S&D zones where there is rectangular cosolidations for institutions to make positions they need.

Order blocks describe a rare type of supply and demand zone created when banks or institution use a block order to enter a significant trading position.

In simple words say banks need to enter a huge buy or sell position, but they don’t want to send the market into a huge rally or a huge drop where there market orders may be triggered at much higher price or sell orders at much lower prices due to impact of such huge orders which they want to avoid. So, they use their secret weapon which is block orders which forms Order blocks.

These sneaky smaller o rders (compared to larger orders they actually want to do)let banks slip into colossal positions without effecting the price much, ensuring they get the best prices and max out those profits.

Block orders split the banks or institutions positions into smaller, more manageable chunks, and then places them at similar prices. The result is that the banks  or institutions massive position gets entered silently without triggering a huge price spike.

Say some bank wants to make 200 million dollars position into smaller chunks, allowing them to enter in a more manageable and discreet way without upsetting price too much. Yes you heard it right. 200 million dollars, thats the size they play in.

Now the banks initial 20 million order gets paired with a say whopping 50 million on the sell side.  So, no sudden price hike here by buy order where the sell orders still overshadow the buy orders, 50 million versus 20 million. Then, once the sell orders are built again up, the block order enters the next chunk. This process of placing one 20 million order, then another, and another, etc  causes a tight range consolidation to form, creating an order block zone.

We can say that order blocks are like supply and demand zones twins where the concept is very similar.

Important question, How Order Blocks Are Different To Normal Supply And Demand Zones?
In simple understanding order blocks are supply and demand zones but just a different type.

1. Regardless of where or when they form in market structure, order blocks always outperform standard supply and demand zones. The reason why is because order blocks form via the banks buying or selling using a block order. which they only use when they have a large position to place. If they’re placing a big position, the banks don’t want price to break beyond the point they bought or sold – the Supply or Demand zone. Therefore, the order block 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.

2. In general, order blocks form the same way as normal supply and demand zones, that is from a sudden, steep rise or decline away from a base. The difference is that the base ALWAYS forms a tight range consolidation. Order blocks always form when price jets away from a tight range consolidation. That’s the structure created when the banks use a block order to enter their positions. The block order enters each position at a similar price, causing the highs of the consolidation to form at almost equal prices which forms the tight range consolidation.

Since order blocks are supply and demand zones – just a much rarer type – you trade the zones using the same process:

  1. Identify a tight range consolidation.
  2. Mark a zone around the consolidation.
  3. Wait for price to return and enter the zone.
  4. Enter upon seeing a pin bar or engulfing pattern.
  5. Take profits as price reverses and moves in your favor to next demand or supply zone or order block for opposite direction

Drawing order block zones follows the same rules as normal S&D zones. However, one point to remember: always include the entire consolidation in the zone. The block order enters positions all over the zone, so you must include the whole area for a correct zone. Wait for price to enter the zone and provide a confirmation signal.

  • For bullish order blocks:
  1. Bullish pin bar/hammer
  2. Bullish engulfing pattern
  3. Large bullish candle
  • For bearish order blocks:
  1. Bearish pin bar/hammer
  2. Bearish engulfing pattern
  3. Large bearish candle

Now: Place a stop on opposite edge of the zone and see if price reverses. Take profits by moving your stop as price moves in your expected direction.

For example below on IGL over 6 -8 days there were order blocks which also happens to be demand zone. On return price reverses back.

Smart Money Concepts – Order Blocks Hidden Gem

Quick Tip: Look for consolidations created by a tight range, where the candles form a rectangle like structure. That indicates the banks created the consolidation using a block order.

Therefore: An Order block must exist at the source and create a zone along the way where positions are being made in market.

Remember sometimes, the consolidation will form after a move rather than at a swing low or high. A clear sign a order block zone must exist at the source.

Quick Tip: When we draw the order block zones, start with the freshest major swing low/high and stretch it to the consolidation with a rectangular zone pattern.

Q: What Is Meant By Order Block Imbalance?

A: Order block imbalance refers to the rapid spike or fall in price caused by banks entering the market via order blocks.

The order imbalance causes the rise/fall and produces the order block zone. The same happens with regular S&D zones, just through the use of standard orders instead of block orders. The imbalance between orders creates the zone.

Q: What Is Order Block Theory?

A: Order block theory states institutional traders use block orders to enter trades.

Block orders have been around for decades.

Q: What’s The Best Timeframe For Trading Order Blocks?

A: Order blocks appear on all timeframes, so no “best” TF exists.

I look for them on the 1 hour chart, as that’s my main trading timeframe. Order block usually form more frequently on the lower timeframes, however, the shorter timescale decreases their probability.

Summary from me: Order blocks as I mentioned, they make a great setup to watch out for. We 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.