In recent years, forex trading has witnessed a surge in new strategies and developments. Traditionally, retail forex traders primarily relied on technical analysis, like support and resistance levels, to identify trading opportunities. However, a new wave of trading strategies rooted in institutional trading opportunities has emerged, with retail traders eager to align with the entities influencing market movements.

Order blocks are often portrayed as complex concepts, but in essence, they’re rather straightforward. Institutions, such as banks and hedge funds, face the challenge of placing their enormous orders without significantly impacting the market. To address this, they typically execute multiple buy or sell orders in a so-called ‘block,’ creating a zone where prices typically move linearly. This phenomenon offers significant trading opportunities and can help traders establish a directional bias, particularly on higher time frame charts.

Unraveling the Mystery of Finding Order Blocks

Identifying order blocks isn’t always easy since markets don’t always provide clear clues. In an ideal scenario, an order block emerges within a consolidation area, indicating the buildup of positions before a substantial bullish or bearish move. 

The chart depicting USDJPY on a daily timeframe reveals this clear consolidation phase where an order block was forming:

However, the truth is that this formation may not have been obvious at the time those candlesticks were forming. Subsequently, prices made a swift move to the upside, a clear sign of significant institutional positions being built in that zone. This scenario exemplifies a bullish order block. Conversely, had prices swiftly moved to the downside after consolidation, that would have represented a bearish order block. When drawing an order block, there’s no precise tool or scientific method. In essence, it involves connecting the highest and lowest points within the consolidation range.

Trading with Order Blocks: Steering Your Trading Bias

Trading order blocks is a valuable approach for shaping your trading bias. However, it’s crucial to avoid simply setting pending buy/sell orders based on order blocks. Instead, you should use order blocks to guide your directional bias within the markets. 

Here’s a typical example of an order block trade on USDJPY; highlighting a 1-hour chart with a strong bearish order block that contains a 15-minute order block:

When a price retraced to our order block, a bearish opportunity presented itself as the order block was being rejected. This situation required a search for bearish entry opportunities. Thankfully, a temporary support level had been rejected, offering a short trade opportunity when USD/JPY broke below that level. By employing a well-placed stop loss, traders could have enjoyed a rewarding 1:2.6 risk-reward ratio a substantial profit for traders operating with funded trading accounts.

The Spectrum of Time Frames for Order Blocks

Order blocks can manifest in various time frames, including daily, 15-minute, and 1-hour. However, it’s important to note that order blocks formed on higher time frames tend to yield larger pip moves. Consequently, if you’re trading a 1-minute time frame, don’t anticipate a 500-pip win from an order block—it’s highly improbable. When trading order blocks, your success hinges significantly on human decision-making and the ability to manage risk effectively. Trading on shorter time frames like the 1-minute chart leaves little room for thorough analysis of technical and fundamental aspects, making it a better practice to trade on higher time frames.

Understanding Order Blocks and Leveraging Their Power

In essence, order blocks represent areas where institutions and large trading firms place substantial orders capable of moving currency prices. Traders often exploit these zones by following the logic that if institutions are buying or selling at a particular price, it’s prudent to ride alongside them. This strategy is favored by some of our funded traders, and it’s a powerful tool in your trading arsenal if you’re aspiring to secure a Forex prop firm funded account. Work with True Forex Funds to unlock your potential as a trader!

Start your trading journey today!

Get funded