Notes on Trading Order Blocks

Introduction

• Many traders struggle with trading order blocks.
• Common issues include getting stopped out unexpectedly.
• This lecture covers how to find profitable order blocks.

Key Points Covered

1. What is an Order Block?

   • An order block is a price area with large resting orders waiting to be triggered.
   • Expect price to react when it trades into these order blocks.

2. Identifying an Order Block

   • Look for a large volume spike, characterized by an aggressive candle.
   • For a bullish order block:
     • Identify the last candle before the bullish impulse (sell to buy candle).
     • Look for a fair value gap (imbalance) between the first and third candle's wicks.
   • For a bearish order block:
     • Identify the last buy before an aggressive sell.
     • Ensure there is a fair value gap.

3. Three Key Rules for Selecting Order Blocks

   • Rule 1: Pro Trend
     • Trade in the direction of the overall trend.
     • Example: Higher highs and higher lows indicate an uptrend.
   • Rule 2: Run on Liquidity
     • Look for liquidity runs before an order block forms.
     • Example: A bullish structure with a push that causes liquidity run.
   • Rule 3: Break of Structure
     • The order block must be within a price leg that has a break of structure.
     • Ensure that the order block aligns with the break of structure.

Practical Example of Order Block Trading

• Trend Direction and Bias:
  • Identify the trend direction (bullish or bearish) before trading.
  • Example: Identify the bullish trend after a series of lower lows followed by a higher high.
• Finding an Order Block:
  • Look for a sell to buy candle with a fair value gap.
  • Ensure it runs liquidity and is within the bullish trend range.
• Entry Confirmation:
  • Use lower time frames (e.g., one minute) to confirm entry when trending bullish.
  • Look for market structure shifts that indicate bullish intent.
• Trade Management:
  • Set stop-loss below the identified order block low.
  • Target a risk-reward ratio of at least 1:5.
• Monitoring Price Action:
  • Observe price behavior around identified order blocks and liquidity zones.
  • Be aware of potential false breakouts and liquidation runs.

Conclusion

• The steps outlined provide a structured approach to trading order blocks profitably.
• Always ensure alignment with the overall trend, look for liquidity runs, and confirm break of structure.