In Forex, an order block refers to specific price locations where substantial market participants, such as institutional traders, have previously placed significant buy or sell orders, and clusters of orders are present in these places, which can affect price movement, liquidity, and market mood.
Furthermore, looking at the chart, it appears to be a pattern made up of numerous candlesticks, where the earlier ones are engulfed by the later ones, and the order block usually denotes a trend reversal like the Martingale Forex Strategy. In this post, we will look at order blocks in Forex and how to identify them.
What Is Order Block In Forex?
Order blocks are supply and demand zones where major market participants place large orders. Because a large volume order might create a fast price movement, it is broken into smaller order blocks that are executed as counter orders gather liquidity. This approach enables institutional traders, such as central banks and other financial institutions, to completely fill a huge order without impacting the price significantly.
On a chart, the order block appears as a range in which the price reverses due to institutional investor pressure, then returns to the zone, and eventually exits it, changing its original direction that helps in Backtesting Forex Trading Strategies.
On a zoomed-out scale, order blocks in forex ranges are readily apparent, with blue and red lines representing support and resistance levels, respectively. Furthermore, at the resistance level, there is an accumulation of liquidity, which is absorbed by large traders’ sell orders. And, under buying pressure, the price rises, reaches the level where market makers’ sell orders are located and then reverses.
Types Of Order Blocks In Forex
One huge order without appropriate counter-trade volume can affect the market structure and cause a gap, but if it is broken into small and manageable blocks, such as equal quantities every 10 minutes, the market structure will change slowly.
Order blocks in forex trading form at the extremes of a trend and at the start of a price movement, and they can take various forms, but their price pattern is consistent.
1. Bullish Order Blocks
According to chart analysis, the Engulfing pattern is created when the last down (bearish) close candlestick is followed by an up (bullish) close candlestick that rises above the peak of the preceding bearish candle.
The bullish engulfing candlestick, which is made up of buy blocks, totally overlaps the previous bearish candlestick, whereas absorption takes time. The bearish candlestick first attempts to return to the support level, but the volume of sell orders is quickly swallowed by a number of blocks of purchase orders. Their execution results in the appearance of two bullish candlesticks, and sellers continue to execute orders, causing the price to fall. Buy orders absorb this volume once more, and a new rise begins.
2. Bearish Order Blocks
A bearish order block is similar to a mirror image. Buyers raise the price, but at some point, they run into the sellers’ corresponding order blocks. Demand is met, and a massive shadow with bearish order blocks emerges on the candle; the price returns to the opening level. The following order block results in a price move down, and buyers have enough liquidity, so the red candle has a shadow down.
Retail buyers are unaware of sell orders from institutional sellers against them as the price reaches a comfortable level to buy, where buyers will face bearish order blocks once more.
Identifying Order Blocks in Forex
There are several criteria to spot order blocks in Forex, such as:
Block orders form in a long-term trend, such as when a major investor monitors a deteriorating asset for a long time and eventually buys it in parts; these quantities are sufficient to cause the price to reverse. However, because a large investor enters the market in stages, the market structure moves slowly and the trader’s orders are executed at the best possible price.
2. Trading Volumes
The Forex market should be flooded with liquidity as a result of huge trading volumes, but the market maker should not flaunt a large volume so that regular traders are unaware of its presence. So, if a market maker places one-tenth of the whole buy order amount in the market but there is no liquidity, there is simply no one to sell the remaining one-tenth of the order.
The order block will function if there is a steady flow of counter orders, and sellers must be certain that the price will fall; the market maker will then just have to absorb the sell orders placed.
Because the market maker’s split orders are made sequentially, the development of an order block is only observable in a longer timeframe, when all order volumes are aggregated into the body of one candlestick.
Block orders are comparable to supply or demand zones, and they look similar on the chart: there is a price halt at a strong support or resistance level, its testing, and subsequent decline. Their personalities, however, are distinct.
Trading Order Blocks in Forex
Trading order blocks is a terrific approach to developing your trading bias, but it is strongly discouraged to just create a pending buy/sell on order blocks. It is advised to only employ order blocks to direct your directional bias inside the markets.
On a chart, an obvious/strong bearish order block is building, which is surrounded by another 15M order block, and the 15M order block allows us to dial into the trade and discover a more particular level to be rejected. Of course, we wouldn’t have realized an order block was being constructed at the time, so there was no genuine opportunity to place a bearish order. However, when the price returned to our order block, a bearish chance presented itself.
As the order block was being denied, we would need to start looking for bearish entry points, and luckily, there was a support level that had been briefly rejected. This presents an opportunity for us; if the USDJPY falls below that level, we will be able to go short. And that is exactly what happened. With a more flexible stop loss, you would have exited this trade with a 1:2.6 RR, which would be a significant profit for a trader with a funded trading account.
In Forex, order blocks are areas of high orders placed by institutions and large trading businesses that are substantial enough to impact the price of a currency pair. Traders can profit from these locations by following the basic reasoning that if institutions are buying/selling at that price, you should be doing the same. The order blocks pattern, on the other hand, is a technical analysis tool that takes into account trading psychology, has a justification, and hence works almost always. You should practice visually distinguishing it from false breakouts and other flat or trend continuation patterns.
1. Are order blocks the same as support and resistance levels?
Order blocks are similar to support and resistance levels, but they tend to be more specific and are often identified based on price reactions rather than fixed horizontal lines. Support and resistance levels can include a broader range of price points.
2. How can I identify order blocks on a chart?
To identify order blocks, look for areas on the chart where the price had a strong reaction, leading to a reversal or slowdown. These areas are often characterized by a sudden change in momentum, high trading volume, and a clear shift in price direction.
3. Can order blocks be used as a trading strategy?
Yes, some traders use order blocks as part of their trading strategies. They might look for opportunities to enter trades when the price revisits an order block, expecting a similar reaction to occur again.
4. What other factors should I consider when trading order blocks?
While order blocks can provide valuable insights, it’s important to consider other technical and fundamental factors as well. Combine order block analysis with other indicators, trend analysis, and market sentiment to make well-informed trading decisions.
5. Are order blocks more effective on certain timeframes?
Order blocks can be identified on various timeframes, but they might carry more weight on higher timeframes, such as daily or weekly charts, due to the significance of the price reactions over longer periods.