Order block is one of the most hyped terms in Smart Money Concept.
The main problem of the order block, however, is that its definition and explanation are different and even contradictory in various sources.
In this article, I will share my vision of order block. I will explain what is order block in trading, how to identify it and apply in Smart Money Concept trading.
What is Order Block
Order block is a certain area on a price chart where a significant amount of market orders were executed. Such an event causes a sudden price reversal and a shift of the market sentiment.
The execution of a big amount of orders causes the imbalance in a supply and demand.
Opening of a significant volume of buying orders makes demand dramatically exceed supply.
Such an imbalance is usually accompanied by a formation of a strong bullish candle that engulfs the entire range of a previous bearish candle.
Such a candle is called a bullish engulfing candle.
Take a look at a price action on EURJPY pair.
The market was falling steadily and it was strongly bearish.
A test of some price level triggered a sudden reversal and a shift in the market sentiment. The pair formed a bullish engulfing candle and then started to grow rapidly.
While the execution of a significant volume of selling orders makes supply dramatically exceed demand.
It creates the imbalance on the market. One of the most accurate indicators of that, is a formation of a strong bearish candle.
Its body should completely engulf the range of a previous bullish candle.
Such a candle will also be called a bearish engulfing candle.
Above, you can see that USDJPY was trading in a strong bullish trend.
Then, some price level was tested and the price suddenly formed a bearish engulfing candle.
Order Block Zone
Order block will be the area based on the range of the last candle before the imbalance candle is formed.
In the example on EURJPY, a bullish order block will be based on the range of the last bearish candle before the formation of a bullish imbalance.
In the example on USDJPY, a bearish order block will be based on the range of the last bullish candle before the formation of a bearish imbalance.
How to Apply Order Block
Once the Order Block is confirmed by a formation of a high momentum candle, it will be applied as the safe area to trade the market from.
With a high probability, the price will retest the order block after some time, before initiating a strong directional movement.
That will give you a perfect entry for the trade.
In our example on EURJPY, after a formation of a bullish engulfing candle, the price quickly retested the order block before a bullish wave started.
In the example on USDJPY, after a formation of a bearish engulfing candle, the price retested the order block zone and a sharp bearish rally started then.
Why The Market Retests the Order Block
Smart money, the institutional traders, trade with huge trading volumes.
They can not execute all their orders at once within the order block zone.
Smart money tend to split their positions into a pull of small orders. Part of them is executed after the first test of an order block zone, another part(s) is executed during the retest(s).
With such a strategy, Smart money are trying to hide their presence and mitigate the impact costs.
Even though the retest of an order block is a very frequent event, always remember that there is no guarantee that it will be retested.
In some cases, a bullish / bearish rally will continue without its retest.
How to Trade Bullish Order Block
Bullish order block will be the perfect and safe zone for you to buy the market.
Above is an example of a bullish order block zone.
After a formation of a bullish engulfing candle, the price retested the order block before a significant bullish movement initiated.
The best entry point will be the retest of an upper boundary of the order block.
Stop loss should lie below the lowest week.
Take profit should be the closest key resistance.
That is how you trade a bullish order block.
How to Trade Bearish Order Block
Bearish order block will be the perfect and safe zone for you to sell the market.
Above is a perfect bearish order block on AUDCAD pair.
The safest entry will be on a retest of a lower boundary of a bearish order block.
Stop loss should lie above the highest wick.
Take profit will be the closest key support.
You can see that in that particular case, the price retested the order block multiple times before it dropped to the target.
I believe that my understanding of what is order block is the most compelling. It is based on a solid logic and such blocks provide very accurate opportunities with high reward potential for trading smart money concept.
