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What are order blocks and how to trade them? Full Order Block guide from A to Z

July 27, 2023

Order blocks are like little tip-offs telling us when the big fish in the market, like major banks and big businesses, are about to make a big splash. Think of the Central Bank as the big boss who sets the game rules, so traders need to keep an eye on what they're doing.

When an order block shows up, it's like the market taking a coffee break, moving a bit up and down, and chilling out. This is when the big decisions on buying and selling are made. Once the coffee break's over and the order block is done forming, the market usually starts running in one direction or the other, kinda like a sprinter out of the blocks. The secret to getting order blocks is that they give us a sneak peek into what the big players in the market are up to. Using order blocks can help you decide when to jump into a trade and boost your chances of making a winning move. 

So, in this post, we're gonna give you some top tips on how to use order blocks the right way and when it's better to steer clear of them. Plus, we'll share a free e-book and a free order block indicator.

So what's an Order Block?

An Order Block is a handy tool that helps us see where the big guys are likely to put their money. It's like a secret sign where big businesses gather their orders before diving into the market around areas known as Order Blocks. But, when banks decide to place their orders, they don't just chuck one big order into the market all at once, and they certainly don't put their order in just anywhere. They like to take their time, placing their orders at specific price levels around these order blocks, bit by bit.

This lets them put their money into trades at several sweet spots. It means they can get the best prices a few times without causing a massive stir in the price. They prefer to dip their toes in with a few smaller positions. Each time the price drifts away from the Order Block, it tends to come back, letting the big fish put in more orders using Order Blocks.

Are Order Blocks the same as Supply and Demand levels?

Some folks say that Order Blocks are special types of Supply and Demand Zones that form in a way that looks like a range. But that's a bit off the mark, and here's why. Supply and Demand really only make sense when we're talking about physical goods that people need or want, like wheat, corn, or oats. When there's less supply, prices go up, and when demand increases, prices go down.

But in the world of forex, it's the Central Bank that's the puppet master pulling the strings of currency prices all over the world with their fancy computer algorithms and policy decisions. Because the Central Bank has the power to tweak and tinker with prices, Supply and Demand Zones don't have the same pull. Plus, since the Central Bank can just print more money when it needs to, the whole idea of Supply and Demand Zones gets tossed out the window.

For these reasons, forex prices (and CFDs in general) don't dance to the tune of Supply and Demand. The idea of Supply and Demand in Forex doesn't really help us understand why order blocks form and it's not a good way to think about them. They're just not the same thing, or even that similar.

How do you find Order Blocks?

Order Blocks in Forex are kinda like a curtain-raiser before a big price jump or drop. It's as if the price steps out of the Order Block range for a moment, makes a big leap, and then bounces back into the range to scoop up more orders.

Imagine you're spotting an Order Block. It's like waiting for that critical price leap. Once you see it, it's time to get sketching! Picture a rectangle in your mind, then mentally draw it from the top to the bottom of the Order Block area. Now, extend that rectangle to the right, like this:

In the perfect world, the order block does a little more than just hang around. It causes a bit of a shakeup, a structural break, which can be either internal or swing structure. Picture it like a minor tremor that changes the landscape just a bit. You can use the free order block script of Sonarlab that identify the order blocks on auto-pilot. We also offer a premium package where we cover al concepts and confirmation tools that help you with trading SMC and order blocks. Click here for more information.

Now, the order block flexes its muscles even more when there's an imbalance/ fair value gap on the break and creation of the order block. Imagine it like a seesaw that's tipped more to one side. This gives the order block an extra boost, making it stronger. Can you spot the imbalance/ fair value gap? If not please check out our free Imbalance Finder Tool on TradingView.

Adding confluence to your Order Blocks

Order blocks are awesome on their own, but when you throw in the mix of market structure and imbalances, they become super awesome. But, hang on, what if I tell you there's more spice you can add to this mix to make these zones even more likely to hit the jackpot? Yep, you can pile on confluences and mix in other trading concepts with your order blocks. And we haven't even chatted about confirmation yet! So, let's run through a few examples.

Examples Confuences

Fibonacci retracement

Fibonacci retracement levels that buddy up with your order block. It's like having two friends meeting up at the same spot. You can download this tool for free here, that will help you spot fib retracement levels on auto pilot for you based on range and swing structure.

See how the 0.5 fib level act as an extra level of resistance

Order block strength calculator

Order block strength calculator tool that gives you the lowdown on the volume strength inside the order block. The higher the %, the beefier the order block.

Point of Control - Volume Profile

Point of control with range Volume profile. This shows the busiest area of a range, volume-wise. If this meets up with your order block, it's like a power-up for your order block.

Round numbers

Round numbers, which banks find interesting for closing their positions or opening new ones. This also ups the chances of a win. You can download the indicator here for free.

The red line is the round numbers that aligned with an FVG below an order block

Confirm your order blocks

Confirming a trend reversal is like confirming your order blocks. This sounds easy, but what I mean is that you can use any form of trend confirmation tool that you are used to.

As you might know, the market is fractal and what happens on a higher timeframe always kicks off first on a lower timeframe. With this in mind, we need to switch to a lower timeframe when the price hits our order block. Now, you might be thinking, what's the perfect combo? Well, that depends on what kind of trader you are. Here are some top-notch combinations of timeframes for trading order blocks. Let's break it down:

The confirmation consists of two timeframes: your zones (order blocks and key levels) timeframe and the confirmation timeframe. Confirmation can be all sorts of things, but ideally, it's some sort of shift in the market structure and here can be added extra confluence to, like shown above in the previous example of stacking confluences.

Some really good combinations:

1. Position trader: Weekly and Daily

2. Swing trader: Daily and 4H

3. Intra-day trader: 1H and 15m

4. Day trader: 30m and 5M

5. Scalper: 15M and 3M

Example of market structure confirmation Lower Timeframe

You can see that the SMC Alert builder had the rule to look for Weekly Order Block and a Daily structural confirmation, which gave us an amazing long entry and multiple re-entries (as shown below). It print a signal based on the combinations you fill in, for example weekly order block and daily confirmation. If you want to have these confirmations on auto-pilot like shown above, make sure to checkout our SMC Alert Builder, which gives you signals based on these combinations and much more.

So, there you have it, folks - a deep dive into the intriguing world of Order Blocks. Order Blocks are like backstage passes, giving you sneak peeks into the strategies of the market's big players. They're not just a fancy term, but a powerful tool that can give your trading a major boost.

Keep in mind, though, that while Order Blocks provide great insights, they're not standalone strategies. Incorporate them into your broader trading game plan and remember to add other tools into the mix for higher probability trades. Whether it's the Fibonacci retracement levels that team up with your Order Block, or the volume strength inside your Order Block, stacking these confluences can create more opportunities for you.

It's like playing a high-stakes game of chess. You need to always think a few steps ahead, switching to a lower timeframe when the price hits your Order Block, and confirming your Order Blocks using shifts in the market structure. Your style of trading will influence your approach. Whether you're a position trader, swing trader, day trader, or scalper, there's an ideal combination of timeframes for you.

In essence, trading is a skill that you develop with time and experience. The knowledge of Order Blocks and how to effectively utilize them could just be the edge you need to come out on top in the world of Forex trading. Happy trading!

Remember, information is your biggest ally, so keep learning, keep experimenting, and most importantly, keep trading!

What are Order Blocks in Forex trading?

An Order Block in Forex trading is like a secret clubhouse where the big financial players, like banks, hang out and plan their moves. They don't just throw all their money at the market at once. Instead, they like to scatter their orders bit by bit around certain price levels known as Order Blocks. This way, they get a chance to buy or sell at the best prices without making big waves in the market.

How can I identify an Order Block?

Spotting an Order Block is like watching for a big leap in price. Once you see that leap, imagine a rectangle from the top to the bottom of the Order Block area and stretch it to the right. This rectangle is your Order Block. When the price takes a dive or shoots up and then comes back to this rectangle, that's your signal that the Order Block is in action. Sonarlab SMC Indicator and Free order block indicator can also help identify order blocks on auto-pilot.

Are Order Blocks the same as Supply and Demand Zones in Forex?

An Order Block in Forex trading is like a secret clubhouse where the big financial players, like banks, hang out and plan their moves. They don't just throw all their money at the market at once. Instead, they like to scatter their orders bit by bit around certain price levels known as Order Blocks. This way, they get a chance to buy or sell at the best prices without making big waves in the market.

How can I add confluence to my Order Blocks for higher probability trades?

You can make your Order Blocks even more powerful by adding other trading concepts to them. Think of it like adding more players to your team. You can use things like Fibonacci retracement levels, an Order Block strength calculator, or the point of control with range Volume profile. It's like stacking the deck in your favor! Sonarlab offers a wide range of confirmation tools.