i. Order block are price orders placed by institutional traders looking to build their position.
ii. Order flow is the direction in which the price moves after the order block.
Order blocks are huge institutional buy or sell orders placed over a particular period. During these, the institutional players are looking to build up their positions in the markets. Order flow is the price movement that follows after the order block and is a reactionary move.
What are order blocks and order flow?
The forex market is made up of two types of market participants, the retail participants, also known as small money, and the institutional participants, also known as big money.
It is said that retail participants account for only 10% of the entire forex market.
The smart money or the institutional players trade with such a large amount of money that their daily trading activity is what the forex market runs on.
Institutional players are the banks, funds, governments, and other financial establishments that get involved in the forex market.
Since these institutional players have such an enormous capital, they have to be smart when they move that money around in the forex market, hence they are also known as smart money.
On the other hand, most retail traders have no proper idea as to forex trading and simply gamble in the forex market, they are known as dumb money.
Now, these smart money ones have huge capital, and whenever they take trades, the price sees a huge movement. These are block orders.
So block orders are basically trade orders that are placed in bulk.
A normal retail trader with not much capital will not place a large order hence these orders are not called block orders.
The big money drives the forex market and whenever they place a huge order it gets noticed.
Block order trading is all about identifying such a phenomenon and taking advantage of the information it provides. Order flow is what happens after the order block.
Once a block order is placed, the price usually starts moving in that direction as other market participants start to join.
Why do we see order blocks?
Smart money has huge capital, say millions and billions. Whenever they enter trades, the price spikes.
It is known that smart money usually accumulates and builds their trade, but this activity of theirs doesn’t always seem like an accumulation or a price consolidation.
Smart money does not place one order with the full position all at once. If they have to buy $100 million worth of GBPUSD currency pair, then they will place orders in parts.
It could be four $25 million orders, or five $20 million orders, etc. If they place it all at once, they will not get entries at the best prices.
Whenever a huge order is placed and it gets filled, the price starts to move in that direction.
These bulk orders are looked out for and traders then look to trade in direction of the order block. This creates an order flow.
Order blocks are often seen at breakouts and there are traders all around the globe that look to trade these breakouts. This follows the herd mentality and FOMO.
Whenever traders see such a big price movement they just look to enter and ride the movement.
How to spot order blocks?
In order to trade the order blocks effectively, you have to look for an area on the price chart where the price had a large move.
The move could be a counter-trend or could be along with the same trend, but what’s important is that there should be a strong price reaction.
These order blocks normally are wide candlesticks that almost engulf the previous candlestick and price moves in that direction.
Order blocks could also be a price consolidation area.
Now you might be thinking that this is like the supply and demand zones. Yes, it is quite similar. But all order blocks are not supply and demand zones.
The order block area needs to be a strong move and this is usually fuelled by an activity by the smart money.
For instance, if the price is in an uptrend or a downtrend, you will look for a sharp price move either along with the prevailing trend or in the opposite direction, after a brief consolidation.
The sharp moves are identified by big candlesticks that show impulse.
The consolidation that we look for here isn’t a normal consolidation. We do not want a consolidation where the price is in a range. But rather we want a tight price movement.
Identifying such areas on the price chart is difficult, but it is a skill that you must develop and that will reward you.
How to trade order blocks?
Once you identify such an area on the price chart, plot a rectangle around it with one side at the swing high and the other at the swing low.
This becomes your area of interest once the price approaches it again in the coming trading sessions.
If in case the price comes back to this area, you should not blindly place a buy or sell order. You need to look for additional confirmations.
Confirmations could be candlestick or chart patterns, trendline structure, Fibonacci retracements, etc.
Take a trade only when you see that the price is confirming the presence of a value area.
Stop loss will be placed at the opposite side of the zone marked. Some traders also consider a buffer of 10-15 pips.
The main advantage of trading such value areas or order blocks is that your stop loss is very narrow and targets could be very large.
It is because of this lucrative RRR, such trading opportunities aren’t seen very often.
Do you trade order blocks?
Order block trading is a widely followed style of trading, let me know if you have tried your hand at this.
I urge you to try this method of trading for yourself and see the results it can produce.
Share this blog post with every trader you know and let them also take advantage of this trading style.
If you need help regarding this concept then do let me know in the comments section, I will help you out.