Order Blocks (OB) Explained
Order Blocks (OB) are a trading concept used by price action traders (also known as SMC or ICT traders). They locate areas where there is a large amount of buyers or sellers on a chart, where traders can enter positions to profit. In this article, we cover what order blocks are, how to locate them, the best strategies for using them, and the theory behind them.
What are Order Blocks (OB)?
Order Blocks are areas where there’s an outstanding amount of limit orders, causing large reactions in the market when price reaches these areas. A bullish order block indicates that there’s a lot of limit buy orders, while a bearish order block indicates that there’s a lot of limit sell orders.
How to Find an Order Block
The most common way to identify or find order blocks is by looking for the following pattern. A consolidating market, followed by an impulsive move in the market. The area of consolidation signifies an equilibrium in the market, or an area where buyers and sellers are in agreement with the price. However, then one side of the market, either buyers or sellers, will take over, causing a large movement in a direction. If the large move was bullish, we can use the last bearish candle of the consolidation period to mark out our order block. If the large move was bearish, we can use the last bullish candle of the consolidation period to mark out our order block.
How to Find a Bullish Order Block
To find a bullish order block, you want to look for an area of consolidation on your chart, followed by a large bullish movement. You can then draw your order block from the last bearish candle, before the impulsive move. Draw your zone from the low of this candle to the high of the candle.
How to Find a Bearish Order Block
To find a bearish order block, you want to look for an area of consolidation on your chart, followed by a large bearish movement. You can then draw your order block from the last bullish candle, before the impulsive move. Draw your zone from the high of this candle to the low of the candle.
Trading Using Order Blocks
Since order blocks are areas with several unfilled limit orders, we want to trade with them, not against them. Thus, when price is retesting a bullish order block, you should only look for long trade opportunities. When price is retesting a bearish order block, you should only look for short trade opportunities. In this example, price retraces to a bearish order block, respects it, and is followed by a bearish 9/21 EMA crossover, which is a common bearish reversal signal. This gives us good confluence to enter a short trade, setting our stop loss above the order block, targeting a 1:1.5 risk-to-reward ratio.
Indicators used in this trade:
Order Blocks | Flux Charts (FREE)
EMA Cross Dashboard | Flux Charts (FREE)
How do I identify strong Order Blocks?
You can use other trading concepts and indicators to confirm the validity of an order block. In the example above, we used an EMA crossover as confirmation of the bearish trend after price respected the bearish order block.
Which timeframes do Order Blocks work best on?
Order Blocks work on all timeframes depending on your trading style (scalping, day trading, swing trading, investing). However, in trading there’s a general rule that higher timeframes are more consistent and reliable than lower time frames.
What markets do Order Blocks work with?
Order Blocks work in all markets including stocks, crypto, forex, and futures. Since order blocks rely on volatility in the market, we recommend trading high volume assets such as the S&P500, Bitcoin, Ethereum, etc.