A strategy that is not as common with retail traders is order block trading.
You can use many order block strategies to attempt to target significant areas to enter the market and manage your trades.
This post breaks down order block trading and how to use it in your trading.
NOTE: You can get your free order block trading PDF guide below.
Free PDF Guide: Get Your Order Block Trading Strategies PDF Guide
Table of Contents
What is Order Block Trading?
Order block trading is analyzing where large blocks of orders form in the market and using this information to buy or sell.
Big trading institutions and banks usually create these blocks.
Knowing where these big players are putting their order blocks can help you identify the best areas to enter new trades or exit existing ones.
While there is no one central exchange for foreign exchange markets, the big banks and institutions significantly affect where prices move.
Where these whales of the markets are placing their order blocks can have a significant effect on what prices do.
If you know and understand where these order blocks are building up, you can use it to your advantage when making trades.
The key to order block trading is recognizing these critical levels in the market. When prices move into an order block area, we often see large price movements and a spike in liquidity. This can lead to very profitable trades.
Order Block Theory
Because central banks and large institutions play a huge role in price movement, it’s essential to understand where they’re placing order blocks.
There are several reasons these whales are placing orders the way they are, but it’s often to enter or exit huge positions without spooking the market.
If a bank is trying to enter the market at the best possible price, they will use order blocks instead of one large order.
This way price will not explode, and they will get in at the best possible price.
For example: ‘Bank XYZ’ has a huge trade they need to fill…
If they make this trade in one large order, they risk that there will not be enough liquidity to enter it all. They also risk price spiking as they start to enter, and don’t end up with the best price.
Instead, they will enter multiple positions known as order blocks. They will place these order blocks at strategic points where they can be fulfilled and will get the best possible price.
Another example is the way a large institution would break their order up. If they’re trying to enter a market with a $500 million trade, but only $100 million are being sold, they face two things…
The first is that they will be entered into that first $100 million. However, there will still be $400 million left not entered. This could cause the price to spike, and price levels to worsen.
Order Block Smart Money Concepts
Identifying the activities of significant market actors is a central part of the smart money method of trading.
This requires finding the places they arrange order blocks and stop-outs.
To do so, one must inspect the market structure and observe the relevant price fluctuations.
How to Trade With Order Blocks
Order block and smart money trading can be used hand in hand with your other technical analysis and price action trading.
You can also use other helpful indicators that can help you refine trade entries and where to place your take profit and stop loss.
The example below shows how a stop hunt occurs, and you can use this information to make high-probability reversal trades.
The first part of this stop hunt is the clear resistance level that is in place. Each time price has tested this resistance, the big players have stepped in and pushed the price back lower.
The key to this setup is that a large number of stop losses would sit above this resistance. Many traders who have sold when the price hits the resistance would place stops just above.
The big players know this.
When the price moves into the resistance again, it breaks through. This would activate many of these stop-loss orders and close many trades.
This is a false move, and stop out. As soon as the price has popped above this level and hit a lot of stops, it quickly reverses.
Lastly
Order block and smart money trading take some time to practice and master.
After you start to work out where these big order blocks are being placed and when to stop hunting, you can use it to your advantage.
This vital information can help you get on the right side of the market, and instead of having your stops hit, you can trade in the direction of the smart money.
NOTE: You can get your free order block trading PDF guide below.
Free PDF Guide: Get Your Order Block Trading Strategies PDF Guide
