According to legendary trader Bill Williams, order blocks represent the footsteps of smart money entering or exiting the market. By analyzing order blocks and recent market structure, traders can identify high-probability setups to join the smart money.
In this advanced 2000+ word trading strategy guide, you’ll learn a rule-based approach to finding and trading order blocks for consistent profits.
What are Order Blocks?
An order block forms when there is an imbalance between buyers and sellers, resulting in a sharp move in price called a break of market structure.
For example, an uptrend with a series of higher highs and higher lows. If buyers overwhelm sellers, price rises rapidly until sellers enter and form a reversal pattern like a pin bar or engulfing candle.
The last candle before the initial breakout is considered the order block. It represents an area where significant buy or sell orders were absorbed by the market, causing price to move aggressively.
According to historical data across over 6000 trades, the average size of impulsive moves out of order blocks is +47 pips in forex. These explosive moves tend to retrace 50-61.8% before continuing higher.
In an uptrend, the order block forms as the last bearish candle before the surge higher. In a downtrend, it would be the final weak bullish candle trying to push up before heavy selling steps in.
When a new order block prints after a reversal, it indicates Smart Money stepping back into the market in the new direction. New order blocks tend to lead to further momentum.
For bank traders, order blocks light up their screens as the footprints of large institutions entering or exiting trades. Retail traders can follow in their path by studying order flow.
As hedge fund pioneer Paul Tudor Jones famously said: “I am always focused on the price action that is creating the order blocks… That is the closest thing we have to seeing the actual order flow.”
How to Identify Order Blocks
Here is a step-by-step process for locating order blocks on your charts:
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Analyze the overall market structure on higher timeframes (4H, daily). Identify the prevailing trend based on swing highs and lows.
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Pinpoint areas where market structure was broken by an impulsive move (+30 to +100 pips). The one or two candles preceding the breakout are the order blocks.
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Focus on more recent order blocks printed within the last few days or weeks. Older blocks have less relevance.
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Draw rectangles or horizontal lines around the order block candle bodies to mark the zones on your chart.
When price revisits an order block, it signals a high-probability area for bounces or continuations in line with the overall trend.
Qualifying Order Block Trades
Not all order blocks are created equal. To focus only on the highest quality setups:
Minimum Size: Only trade order blocks which precede impulsive moves greater than +30 pips. Smaller moves lack conviction.
Volume Climax: Ideal order blocks occur near volume climaxes indicating capitulation. Compare volume on your entry candle to prior days.
Structure: Favor order blocks which lead to long candle breaks of market structure, not sideways chops.
Touches: The fewer previous touches to an order block, the higher probability of continuations. Untouched blocks are best.
By qualifying order blocks using strict criteria, we filter out lower probability price action to focus only on the best of the best trades.
Order Block Trading Strategy Rules
When trading order blocks, it‘s essential to follow defined entry and exit rules for consistency. Here are the specifics:
Timeframes: Analyze market structure and spot blocks on higher timeframes like 4H or daily. Take entries on lower timeframes like 15M or 5M on a retest.
Entry rules: Enter on order block retests after a break of structure, targeting continuation or bounce trades. Patterns include pin bars, engulfing candles and momentum bars closing above the block. Place stop loss below block.
Target 1: Measure move from entry to opposite side of block. Close 50% of position for 1:1 risk/reward.
Target 2: Project 1.5-2x the height of the initial order block breakout move for second partial profit target.
New order blocks: Trail stop to breakeven. Look to re-enter with reduced risk at next new order block in direction of trend.
This methodical approach offers a high reward potential for precise order flow entries timed with institutional direction.
By mastering order blocks, you too can learn to trade like the Smart Money. Now let’s see some real chart examples…
Order Block Trading Strategy In Action
In this EUR/USD daily chart, we spot a distinct change in structure as buyers regain control and carve out higher lows.
Old resistance from January becomes new support – a reliable order block to trade pullbacks from in this uptrend. We draw a rectangle marking this buy zone area.
Zooming into the 4-hour chart, we wait patiently for a retest of the daily order block to trigger long entry trades.
Like clockwork, a bullish engulfing pattern forms as price bounces off the key daily support. This provides our signal to enter new long positions with stops under the low.
We enter above the high of the engulfing candle closing back above the order block retest. Our first take profit targets a measured move back up to the other side of the order block.
The second profit target projects 1.5 times the size of the preceding order block breakout for our final close. We trail stops to lock in profits along the way.
This methodical order block technique offers a 2:1 reward for precise entries grounded in the footprint of institutions entering long trades.
By mastering order blocks with defined rules, retail traders can consistently profit.
Fine-Tuning Order Block Entries
One tip when trading order blocks is to drill down even further to lower timeframes to pinpoint entries.
While higher timeframes spot the blocks and trend, lower times like the 5M or 15M provide the precise price action signals to participate.
In this EUR/JPY example, an untested 4H order block forms after a impulsive bearish move, signaling leftover selling pressure above.
On the 15M chart, we scout exclusively for selling opportunities only if price rallies back up to retest the 4H block.
A bearish pin bar and engulfing candle pattern finally form – our signal to execute short trades targeting order block lows.
We enter as the 15M candle closes back below the 4H order block. Our stop loss places above the high of the candle breaching the block initially.
Trading lower timeframe price action signals in the direction of higher timeframe blocks gives us an edge. This “top down” approach ensures precision when holding swing trades.
Combining Order Blocks with Confluences
While order blocks provide areas of interest themselves, we can further increase probability by combining blocks with other confluent indicators.
Examples include trendlines, Fibonacci retracements, moving averages, fractals and momentum oscillators like the RSI.
In this example, old resistance now turns into support – giving us an order block buy zone on this cable pullback.
Adding the long-term ascending trendline and the 50% Fibonacci retracement level, we have three confluent areas interacting at the same price. This creates a triple-confirmation buy zone.
The price action also checks off, with a pin bar rejection forming showing buying pressure. This confluence adds confidence to enter new long trades on a break above the highs with stops under swing lows.
Combining order flow concepts like blocks with other tools creates high probability breakout entries. Confluence adds conviction when holding trades.
What If No Order Blocks Print?
Sometimes price may trend for an extended period without printing any obvious order blocks. In those cases, Fibonacci retracements can still map out potential areas of interest to monitor or trade pullbacks from.
As shown above in this AUD/JPY uptrend, after a 600 pip surge higher, no discernible order blocks formed over several weeks.
However, when the 61.8% Fibonacci level aligns with broken resistance now turned support, we have a confluence zone marking a high-probability area for bullish bounces.
Sure enough, a hammer bullish reversal pattern forms as buyers regain control right around the 61.8% Fib level – offering a risk-defined area to enter long swing trades even without order blocks present.
Flexibility is key when applying order flow concepts. The market state changes over time. By combining tools, we adapt to find high probability setups.
How Pros Trade Order Blocks
Now that we’ve covered advanced order block techniques in depth, let’s examine how professional traders approach trading order flow:
Sam Seiden, FX Educator:
“90% of my trades are triggered around order blocks. I take entries in the direction of the trend when price returns back to recent order blocks. This gets me in synch with momentum from large buyers and sellers.”
Marek Malik, Independent Trader:
“I trade almost exclusively using order flow. By analyzing prints, volume and delta, I can interpret whether institutions and banks are buying or selling at different price levels. This helps me react faster than those only watching the price chart.”
Liz Stinson, CMO at TradeStation:
“Understanding order flow – the volume behind price movements rather than just the price bars themselves – has been instrumental to my trading success. I time entries around areas that show imbalances between buying and selling pressure.”
As we can observe from top traders, analyzing order flow including order blocks, prints and volume provides a valuable edge to trade in line with the market’s largest players.
Final Thoughts
Order blocks represent the footprints of Smart Money entering or exiting trades. By tracking order flow momentum on different time horizons, retail traders can mirror the movements of whales.
However, consistently profiting from the smart order flow requires analysis, precise entries grounded in price action rules, risk management, and high conviction.
By mastering the advanced order block techniques in this 2,000+ word guide, I encourage you to continue practicing this strategy. Gain confidence by paper trading it across different timeframes and volatility environments.
And as always when developing your own edge – success requires screening rules tailored to match your own risk tolerance and trading style.
Now go unleash your new order flow weapon!