People love talking about these so here's an overview;
An Order Block (OB) is the final candle in the price action before a market structure break.
It represents (we hope) the end of the current move.
- a down candle before an up move that breaks Market Structure
- an up candle before a down move that breaks Market Structure
You can think about why we might want to trade here. In order for market structure to shift, there has to be enough orders to offset the current direction or flow of the market. When price eventually comes back to this area, we have to imagine that 1; those traders will want to defend their position, and 2; that other traders will see sufficient demand in that area and want to get in and ride the wave.
This 'OB' basically forms a new swing point and that's where we want to trade.
You'll find if you're on the daily time-frame, the order blocks at times will be so big that the candle we associate with the order block will cover such a large are of price that it's almost useless to add it to the chart. In this case what I do is just go down to the lower time-frames until there's something more manageable. Usually by the hourly you will find something suitable.
Example of order block on 30m chart
As you can see, price has been trending upwards, and our order block is marked on the chart after the market structure is violated.
When we spot a market structure break like the one above, we wait for price to return to the order block and enter our trade. It should go without saying: PRICE DOES NOT ALWAYS RETURN. We don't mark out order blocks expecting price to return, we just know that if they do, we have a risk defined setup.
Set an alert just below/above your order block and move on, then buy/sell the retest if you get it.
It's common to enter at the 50% mark on the block, with your stop-loss just below the block. Personally I like to enter a small position about 30% of the way into the block, and add a larger position nearer the 70% mark. The stop will then go just below the block, or near other surrounding swing points if there are any.
*Note: I could've just as easily highlighted this level as an area of support (pic below) and layered my bids in this area. Order blocks aren't a magic tool, its just a name for an area where we can expect orders. It's just another way of saying; "Buy support in an uptrend."*
Summary
- Identify current trend (4h/1d/1w)
- Identify current area of S/R in direction of trend (1h/4h/1d)
- Identify order block on most appropriate time-frame (as high as possible 4h/1h/30m)
- Mark out order block and set alert
- Enter at 50% level of block. Alternatively, layer orders in the block
- Stop-loss an appropriate (discretionary) distance outside the block
- In an uptrend, we look for bullish order blocks
- In a downtrend, look for bearish order blocks
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