Order blocks are a different way of looking at support/resistance and supply/demand. There are two possibilities how a trader can use the concept of order blocks to improve his chart reading and trading skills:
1) Identifying re-entry opportunities into reversal trades
2) Finding high impact price key levels
Characteristics of a good order block
Before we get into the details, let’s examine how an order block looks like and what characterizes a good order block. Here are the key points of an order block:
- An order block is created after a long and strong trend. The order block then looks like a market top or bottom
- Price leaves the order block with a high momentum breakout and/or starts a new trend when leaving the order block
- Price should not stay too long in a range during the creation of the order block
Drawing order blocks on your charts
Those are basically already the main characteristics of a good order block (watch the video for more explanations). Now we come to drawing and charting the order block. Here is how you chart the order block:
- In case of an order block after a rally, you take the high and the last swing low and draw a box around it
- Until price breaks out, the order block isn’t confirmed yet
- You extend the zone of the order block into the future and wait until price comes back to it
You can see, that’s also very straight forward and after a few attempts, you should be able to spot and chart order blocks fast. Now we come to the final point how to trade order blocks.
Two ways to trade order blocks
I mentioned at the beginning that you can use order blocks to either find re-entry opportunities into a trade or to identify high impact price levels. Let’s take a closer look at each point.
1) Finding re-entry opportunities
In our reversal trading, order blocks are ideal when it comes to finding re-entry opportunities. If you have missed the first entry opportunity, you can wait until price reaches the order block again and then time your entry around the order block.
Of course, you can also use order blocks to add to your existing trades and enter on a pullback.
Also, once you are able to identify an order block, you can use this information to manage your stops. Don’t move your stop loss on an existing trade too soon and wait until price has successfully retested the block.
When it comes to timing your entries, make sure to wait until price has confirmed the order block and don’t just enter a trade once the boundaries of the block have been reached. Always wait for the successful retest where you can see that price is moving away from the block again.
2) Identifying key price levels
When price does not immediately come back to the order block, you can still use it to find high impact price levels and then time your trades with this information.
Just keep extending your order block zone until price has hit it again. However, don’t just blindly enter a trade once price reaches the order block. Always wait until you can see that price is really accepting the area as support/resistance.
In our reversal trading, we always look for strong key price levels and order blocks which haven’t been yet tested again are ideal here.
And that’s it…order blocks are a fairly simple trading concept but it can be used as a great additional confluence factor to improve the way you look at charts and execute your trades.