A Comprehensive Guide to Order Blocks

27 ก.ค. 2023

Order Blocks Explained

Now we'll look at one of the important concepts we utilize to find our precise entry points:
order blocks.

So, what exactly is an order block? An orderblock is a visible spot on the chart where a
large order is being placed on the market. You'll notice the order being placed, followed
by a quick move from that region, leaving behind imbalances and a structures would be
broken

The candle before that impulsive move is what we call an "order block," but I want you to
remember that order blocks are essentially areas of supply and demand in the markets,
and we'll go over that later in an other idea.

Essentially, an order block is the fingerprint that market makers and
institutions leave behind on the charts that informs us of their activity and intent
which we can capitalise on. Unlike retail traders, the capital available to market
makers and institutions is enough to move the market and affect price. For this
reason, there are differences in the ways that market makers and retail traders go
about trading in the financial markets.

The first difference to understand is that market makers and institutions
cannot simply place a buy or a sell trade. Due to the high amounts of volume
behind each trade they place (millions of lots), a single buy or sell from institutions
would crash the market. For this reason, they have to hedge each position. In other
words, each time they place a buy, they have to place a sell at the same price, and
vice versa. For example, if a buy is placed at 1.34610, and price moves up 100
pips, the buy trade will be 100 pips in profit, whereas the sell trade from the same
price will be 230 pips in loss. Essentially there is an equal floating profit and loss.

The second difference between retail traders and market makers is that
market makers and institutions do not trade with a stop loss, therefore, the floating
loss in the sell trade from the example above won’t close itself. Therefore, once the
market is at a desirable high, market makers will close the buy positions in profit,
let the price trickle back to their entry point, and close the sell trade at breakeven.

Bullish Orderblock (Demand)
Looking at this textbook example, we can see that the red block was the last bearish candle before the impulsive move, the candle would normally consist mostly body with very minimal wicks, This is what we call our bullish order block. To mark out our OB we draw a zone from the top of the candle to the bottom, but you may also include the wicks.



Bearish Orderblock (Supply)
Looking at this textbook example, we can see that the red block was the last bearish candle before the impulsive move, the candle would normally consist mostly body with very minimal wicks, This is what we call our bullish order block. To mark out our OB we draw a zone from the top of the candle to the bottom, but you may also include the wicks. Looking at this textbook example, we can see that the grey block was the last Bullish candle before the impulsive move, the candle would normally consist mostly body with very minimal wicks, This is what we call our Bearish order block. To mark out our OB we draw a zone from the top of the candle to the bottom, but you may also include the wicks.



HOW TO TRADE USING ORDERBLOCKS

First stage is identifying your higher time frame directional bias. Whether you are looking for intraday or Swing entries you still need to understand which way the market is moving for the pair that you are focusing on. Essentially you want to identify Order blocks from weekly down to the hourly and work off there. However, the more experience you gain, you may find that you can trade intraday moves by having a short term directional bias from lower time frames and finding entries on an even lower time frames. Either way, the concept is exactly the same.



From above we can see a clear break of structure, this is the first thing we look for before looking for OBs. Reason for this, we want to find the candle that created this move, this candle is our OB. The OB is generally the last opposing candle before the move. So if its a bearish break, the OB is a Bullish candle. However, we need to understand what kind of BOS we look for and how to refine our OBs.

HOW TO REFINE ORDER BLOCKS
There are a few ways to refine the OB. The easiest would be moving left from the OB until you find the candle before the impulse which is still within the OB candles range.
Example:



As we can see above, the green candle following the OB hasn't overly moved or broken the range of the OB. This is now our refined OB. You can do this on all time frames. Alternatively, you can locate your OB, and you can refine down the time frames and find a clear open OB within the OB.

So here on the picture, that little candle with big wicks is our OB, however within that candle on a lower time frame, there is a clear OB and this is now our refined OB. You can go down by as many time frames as you like.

TIP: If you are happy with the RR from a particular time frame OB, then Simply use that one. Don't get greedy and don't use lower time frames if it makes you anxious.


UNDERSTANDING BREAK OF STRUCTURE (BOS)
There are two types of BOS, we prefer a full body break.
This is very simple to understand as shown below:



HOW TO TRADE USING ORDERBLOCKS

Safer entry
Identify your Point of interest on the higher time frame. In this example it was the hourly, however as mentioned, this concept can be applied to any time frame. The higher time frames such as 4 hourly or daily are more more swing entries with hourly and lower being intraday.



So here we can see our higher POI. Now from here, you can look deeper into that OB so you have an idea as to where price could potentially go before reversing. Once you find your OB, you can set an alert at the Open of your OB. This frees up your time, meaning you dont need to sit and stare at the screen. The reason we trade is to for our free time, so why waste time staring and waiting.

Once price taps your higher time frame OB, go to a lower time frame. This is up to you and what you are comfortable with, some prefer 1 min some prefer 15 min its up to you. But what we look for is a BOS and an OB on the lower time frame. Once we find our OB we set a limit order at either THE OPEN of the OB or 50% of the OB. This again is up to you.

Once we set the order and set our target to our higher time frame High in this example.

The benefit of using a safer entry over a risk entry:
- More confirmation for the trade
- May get a better RR for the trade

Cons:
- More time consuming
- Sometimes it may not form a BOS on the lower time frame and price may just shoot from the higher time frame OB. So you may miss trades.

Risky entry

This method is very simple. Once you locate your Higher time frame OB, you simply go down the time frames till you find an OB within the higher time frame OB which is clear. Once you find your OB, mark it out. Use an OB which gives you and RR you are comfortable with. Same as before you can set a limit order at the OPEN or the 50% mark of the OB with your stop loss below the low of the OB or the overall low and target the recent high or low depending on if you are buying or selling.



With this style of entry, it is of course riskier. This method is ideal when there is high momentum in the direction you are aiming for. If its more within a consolidation period, it is not worth trying a risk entry.

Either way you go about, you get similar results and its all dependent on your risk appetite and how you are comfortable trading. Trading is personal to you, you dont need to follow what everyone else is doing. You need to what you are comfortable with doing and how you are happy about going about it.

PSYCHOLOGY
This way of trading is all about precision and finding the market at the perfect time of reversal. However, don't get too greedy with the RR, there is nothing wrong with sacrificing a few PIPS and rr for a safer trade.

having a pip stop loss, is not the goal, having a safe trade and saving capital is the main goal. Our percentages are always gonna be crazy even with a 10 pip stop, so dont always look for a smaller stop if there isn't one available.

Focus on yourself and what you are comfortable with. Don't trade time frames that you are not happy trading. the goal is not to be replicas of Vertex traders. The goal is to be you and be yourself as a trader. Be selfish and think about yourself and your own growth.


FAQ

When do we delete orders? When TP is hit or if there is a new BOS leaving another OB

Best timeframes? Any that makes you comfortable . if lower time frames make you anxious, don't use it. You want to be calm and relaxed when trading, not on edge.

Best pairs? Main indexes or pairs.