Order blocks are one of the most powerful concepts in smart money trading. They represent areas where institutional traders placed their orders, creating zones that often act as strong support or resistance when price returns. Learning to identify and trade order blocks can significantly improve your trading results.
What is an Order Block?
An order block is the last candle before a strong impulsive move. It represents the area where large institutional orders were placed that caused the subsequent move. When price returns to this zone, it often reacts because there may be unfilled orders or because other traders recognize the level.
Simple definition: An order block is the origin of a strong price move. It is marked by the last opposing candle before price moved aggressively in the opposite direction.
Types of Order Blocks
Bullish Order Block
A bullish order block is the last bearish (red/down) candle before a strong bullish move. It represents an area where institutional buyers accumulated positions. When price returns to this zone, it often finds support.
Bearish Order Block
A bearish order block is the last bullish (green/up) candle before a strong bearish move. It represents an area where institutional sellers distributed positions. When price returns to this zone, it often finds resistance.
How to Identify Order Blocks
Finding a Bullish Order Block
- Identify a strong impulsive move up (break of structure)
- Look at the candles before the move started
- Find the last red candle before the impulse
- The body of this candle is your bullish order block
- Mark the zone from the candle body low to high
Finding a Bearish Order Block
- Identify a strong impulsive move down (break of structure)
- Look at the candles before the move started
- Find the last green candle before the impulse
- The body of this candle is your bearish order block
- Mark the zone from the candle body low to high
What Makes a Valid Order Block
Not every candle before a move is a tradeable order block. Here are characteristics of strong order blocks:
- Caused a break of structure: The move from the OB should break a previous swing high or low
- Strong displacement: The move should be impulsive with large candles
- Created imbalance: Often leaves a fair value gap nearby
- Unmitigated: Price has not yet returned to the zone
- In line with higher timeframe: More reliable when aligned with the trend
Trading Order Blocks
The Basic Strategy
- Identify the trend direction on a higher timeframe
- Wait for a break of structure in the trend direction
- Mark the order block that caused the break
- Wait for price to return to the order block zone
- Look for a reaction or entry signal at the zone
- Enter with stop loss beyond the order block
Bullish Order Block Trade Example
The market is in an uptrend on the 4-hour chart.
- Price breaks above a swing high at $110 with strong momentum
- The last red candle before the break has a body from $105 to $107
- This is your bullish order block zone
- Price pulls back and enters the $105-$107 zone
- You see a bullish rejection candle form in the zone
- Enter long at $106 with stop loss at $104 (below the zone)
- Target the previous high or beyond
Order Block Entry Methods
1. Aggressive Entry
Enter immediately when price touches the order block zone. This gives the best price but has lower confirmation. Use wider stops.
2. Confirmation Entry
Wait for a lower timeframe reaction within the zone before entering. Look for engulfing candles, pin bars, or a shift in lower timeframe structure.
3. Break and Retest Entry
Wait for price to break through the order block, then retest it from the other side. This confirms the level is significant but may miss some trades.
Stop Loss and Targets
Stop Loss Placement
Place your stop loss beyond the order block zone. For bullish order blocks, the stop goes below the zone. For bearish order blocks, the stop goes above the zone. Leave a small buffer for spread and volatility.
Target Selection
- Previous swing high or low (safe target)
- The next order block on the other side
- 1:2 or 1:3 risk to reward ratio
- Key liquidity levels (previous highs or lows)
Order Block Refinement
You can refine order blocks on lower timeframes to get tighter entries. The process is simple:
- Mark the order block on your trading timeframe
- Drop to a lower timeframe (e.g., from 1H to 15M)
- Find the smaller order block within the larger zone
- Use the refined zone for a tighter stop loss
Common Mistakes to Avoid
- Trading every order block: Only trade OBs that caused significant moves
- Ignoring trend: OBs work best when aligned with the higher timeframe trend
- No confirmation: At least wait for price to reach the zone
- Stop too tight: Give the zone room to work
- Trading mitigated OBs: Once tested, an OB loses much of its power
Order Blocks vs. Supply and Demand
Order blocks are similar to supply and demand zones but have specific characteristics:
- Order blocks focus on the last candle before a move
- They require a break of structure for validity
- They are part of a broader smart money framework
- Supply and demand zones can be broader areas
Track Your Order Block Trades
Pro Trader Dashboard helps you analyze your trading performance. Track your win rate on order block setups and see which zones work best for you.
Summary
Order blocks are powerful trading zones that represent institutional order flow. By learning to identify the last candle before strong moves and waiting for price to return to these zones, you can find high-probability trade entries. Focus on order blocks that caused breaks of structure and align with the higher timeframe trend.
Continue learning with our guide on fair value gaps or explore liquidity zones.