WHAT ARE ORDER BLOCKS?

Institutional money enters the market algorithmically at key levels in increments known
as order blocks. Rather than entering hundreds of millions in currency into the market at
once, institutional orders are broken up into multiple entries creating tight consolidations
that we see right before an impulsive movement in the market. This method leaves an
institutional footprint on a chart that can be identi ed and capitalized on.

The most important thing to understand about these institutional orders is that there is
no protective stop loss being used. The reason for this is because institutions hedge their
positions (buying and selling simultaneously). You may be wondering, “Why would they
do that instead of just using a stop loss?” The answer is simple, institutions move the
market, they do not lose.

Let’s say a short position and long position are taken at the same time at a key level in
the market; market momentum dictates price to move higher in favour of the long
position. That still leaves an unattended short position in drawdown (unrealized loss).
Once the long position has reached the desired target, price must then retrace back
down to the short positions point of origin to mitigate the unrealized loss. Once the loss
is mitigated, more often than not price will then continue in favour of the dominant
trends momentum.

During this process of order block mitigation, retail traders are busy focusing on double
tops, ags, bonacci, moving averages and other indicators that have nothing to do with
WHY price does what it does. This allows institutional money to play with retail traders
and liquidate their positions in the form of “stop hunts”, or “fake-outs”. The truth is, this is
simply institutional algorithms doing what they were designed to do.

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 HOW TO TRADE ORDER BLOCKS

Let’s begin to take a look at some real price action examples of order blocks so we can
learn to identify them and trade them with a rule based system. The rst thing we look for
before identifying order blocks (OB), is a break of structure (BOS). This indicates a shift or
a strong continuation in market trend.

If there is no BOS, there is no order block. Do not overcomplicate your analysis. Higher
time frames (HTF) are best for identifying OB’s. EX: Daily, 4H, 1H.

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 HOW TO TRADE ORDER BLOCKS

The next step is to identify the order block zone. These zones are easily identi able
because they are tight consolidation areas in-between impulsive moves.

The best way to highlight these zones is with a simple rectangle tool in your charting
platform. It’s important to note that you should include both candlestick bodies and wicks
when plotting your order block zones.

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 HOW TO TRADE ORDER BLOCKS

Now that we have identi ed our point of interest (POI) we can re ne our zone down to
the last opposing candle prior to the impulsive move. In this scenario, we have bullish
momentum and we are looking for buys. We need to identify the last bearish candle prior
to the bullish impulsive move. If the surrounding candles and wicks are small, it’s best to
include them as well.

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 HOW TO TRADE ORDER BLOCKS

This is the last area of institutional activity prior to the impulse. This is the area where a
hedge position may be mitigated before continuing bullish momentum. These are the
points in the market that allow us to achieve entries with sniper level accuracy and very
tight stop losses, resulting in very favourable risk/reward positions.

Let’s move on to structuring our trade position. If we have accurately analyzed the
market, we should be able to place our entry at the open of the OB candle, our stop loss
just below the OB candle and our target pro t at the nearest structural high.

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 HOW TO TRADE ORDER BLOCKS

The tight stop loss may look intimidating, however we do not get emotional. We know
that if our stop loss is hit, our analysis was wrong and that it’s time to reassess the market
for a new entry, wait for a better setup, or simply move on to another currency pair.

This position was triggered perfectly with only 2 PIP’s of drawdown, resulting in a
massive +10.77R pro t. A textbook example of order block mitigation and continuation.

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 ORDER BLOCK REFINEMENT

As previously mentioned, it is best to locate order blocks on higher time frames (HTF),
however that typically leaves you with a very large range to place your stop loss. With this
strategy it is not necessary to have a stop loss any larger than 10 PIP’s. In order to shrink
the gap between entry and stop loss, we must re ne the order block by utilizing lower
time frames (LTF).

In the example below, we can see an order block on the 4H time frame that was
responsible for a break of structure (BOS). We label this our point of interest (POI).

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 ORDER BLOCK REFINEMENT

To begin our re nement process, we need to perform top down analysis and drop
down to a lower time frame. From the 4H, we drop down to the 1H time frame.

As soon as we get to the 1H time frame and zoom in, we can see that the 4H bearish
candle is actually comprised of smaller 1H candles. We can now adjust our rectangular
zone to t the last bearish 1H candle. By doing this, we drastically shrink our zone from
24 PIP’s to just over 9 PIP’s.

As previously discussed, our maximum stop loss is 10 PIP’s, so this trade setup now ts
within our parameters. It’s important to note that as soon as criteria is met we must stop
the re nement process. If we get too greedy with our entries and “over re ne” the zone,
we will often miss opportunities and watch price take off without us.

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 ORDER BLOCK REFINEMENT

We now have a clear entry and stop loss zone to set up our trade. It’s best to target the
open of the candle for our entry, this achieves better risk/reward parameters and is a
more probable mitigation point for price to test.

As for the stop loss, it can be placed just below the order block candle. The target pro t
can either be set at most recent structural highs/lows, or the next major order block that
price may react from. In this case, targets are set at a recent structural high. This position
has a potential outcome of a +16.8 reward.

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 ORDER BLOCK REFINEMENT

Now let’s take a look at the 4H time frame again to see how this trade eventually
played out. The position triggered with precision accuracy at our re ned zone, only
experiencing a small drawdown of -1.5 PIP’s.

We technically could have entered from the original 4H zone and still have been
triggered in. However, the entry point would have been higher up which would increase
the stop loss size and drastically minimize the overall risk/reward ratio. By risking only 1%
of capital on this trade, the result of +16.8% came to fruition in just 10 days which is more
than what most traders take home in an entire year.

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 ENTRY TYPES

With this strategy there are two main entry types we look for in order to execute trades.
So far in this book we have only learned one of them, the risk entry. Now that you have a
rm understanding of the risk entry as an introduction to this strategy, it’s time to learn
about the con rmation entry.

The risk entry is when we identify an order block, re ne it and then place a limit order
at the desired level. This entry style can achieve great results but overall has a lower win
rate. The con rmation entry tends to be much more successful because as you may have
guessed, we have an added layer of con rmation prior to our trade execution. See the
image below for an example of a con rmation entry.

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 CONFIRMATION ENTRIES

The concept of the con rmation entry is simple. After locating the higher time frame
order block, we patiently wait for price to enter that zone. If price violates the order block
then we have just avoided an unnecessary loss. If price begins to reject the order block
that means we can drop to a lower time frame (EX: 15M, 5M, 1M) to locate a BOS and the
order block responsible for it. After the HTF order block has been con rmed valid, we can
set a limit order at our LTF order block.

Let’s walk through a real trade example to better understand how con rmation entries
work. In this example our HTF order block is located on the 30M time frame. Price has
entered the order block zone which means we can now utilize a lower time frame and
wait for proper BOS con rmation.

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