Order Blocks in Trading

Overview

This lecture covers the concept of order blocks in trading, how to identify valid order blocks, and practical trading entry methods based on them.

Order blocks are chart areas where large market participants (e.g., banks) place significant buy or sell orders.
They are similar to supply and demand zones but more effective for tracking smart money actions.
Order blocks help identify where institutional traders entered and may re-enter the market.

There are four strict criteria for a zone to be considered a valid order block:
1. The pivot candle must close above (bullish) or below (bearish) the previous candle.
2. The order block must create an imbalance (a price gap between the pivot candle and the next-next candle).
3. The order block must be unmitigated, meaning price has not yet returned to fill all orders.
4. The order block must lead to a break of market structure (indicating a significant price move).

Look for a sharp and substantial price movement to spot a pivot candle.
Draw a box around the high and low of the pivot candle before the movement.
Check if each of the four criteria is met; if not, the zone is not a valid order block.

Risk Entry Method: Place a buy/sell limit order at the edge of the order block and set stop-loss above (for sell) or below (for buy) the block.
Risk entry is fast but can lead to more losing trades if the order block fails.
Confirmation Entry Method: Wait for price to enter the order block, then look for a market structure shift on a lower timeframe before entering.
Confirmation entry is slower but tends to have a higher win rate due to added confirmation.

Set take-profit at the next swing high/low or opposing order block.
Advanced traders may further refine entries by waiting for additional confirmation or retests in demand/supply zones.

Order Block — A price zone where large market participants placed significant orders, often signaling future price reactions.
Pivot Candle — The final candle before a sharp price movement, used as a boundary for the order block.
Imbalance — A price gap left by aggressive market orders, visible between the pivot and subsequent candles.
Mitigated — A zone that has already been revisited and filled by price, reducing its effectiveness.
Break of Structure — A significant move breaking the previous swing high/low, confirming the validity of an order block.

Practice spotting valid order blocks using the four criteria on different charts.
Try both risk entry and confirmation entry methods in a simulated environment before trading with real money.
(Optional) Study liquidity concepts to further enhance your order block strategy.