The "Order Block" Theory
Summary
TLDRThis video script offers a comprehensive guide to understanding order blocks in trading, a strategy to outperform the competition. It covers four key steps: identifying market bias, recognizing order blocks, applying relativity theory across time frames, and analyzing retracements. The script emphasizes the importance of context, the rules for identifying high-probability order blocks, and the significance of fair value gaps in determining market direction, ultimately aiming to enhance viewers' trading strategies.
Takeaways
- 😀 Bias is the direction of the market, also known as overall drawn liquidity, and is crucial for understanding where the market is likely to move next.
- 🔍 Order blocks are not just any up or down candles; they must come off previous support or resistance levels, often forming off of fair value gaps or previous order blocks.
- 📊 To mark an order block correctly, one must consider the relationship between the fair value gap and the candle's wick or body, as this affects the block's sensitivity and potential to hold.
- 📚 Relativity theory in trading emphasizes the importance of context across different time frames, with higher time frames being the most influential.
- 🔄 Retracement is a key concept for confirming an order block's validity, with fair value gaps and expansion phase candles providing signals about the market's intention to continue in a certain direction.
- 📉 Bearish fair value gaps indicate a strong downward push in the market, suggesting that price is likely to continue lower, especially if they are respected during retracements.
- 📈 Bullish order blocks may not hold if there is significant bearish momentum, as seen through expansion phase candles and potential fair value gaps going against the intended direction.
- 🛑 Disrespecting a fair value gap by trading back into the first candle's low can negate the bearish signal and confirm a higher probability of the price continuing in the bullish direction.
- ⏳ Traders should avoid focusing on lower time frame order blocks without context from higher time frames, as these can be misleading and of lower probability.
- 🔑 Understanding the basics of price action, such as fair value gaps and expansion phase candles, is fundamental to recognizing market manipulation and potential trading opportunities.
- 📝 The script suggests a step-by-step approach to analyzing order blocks, starting with identifying bias, understanding order block formation, applying relativity theory, and finally analyzing retracement patterns.
Q & A
What are the four steps mentioned in the video script to understand order blocks?
-The four steps are: 1) Understanding bias, which is the direction of the market. 2) Identifying what an order block is and its significance. 3) Applying the relativity theory, which involves understanding the context of different time frames. 4) Analyzing retracement, which is the process of the price moving back towards an order block.
What is meant by 'bias' in the context of the video script?
-Bias refers to the overall direction of the market, also known as the direction of liquidity flow. It helps in determining the most probable direction in which the market is aiming.
How does the script define an 'order block'?
-An order block is not just any up or down candle on a chart. It is a high-probability area that comes off a previous support or resistance level, often formed off of previous fair value gaps or off of previous order blocks.
What is the importance of 'fair value gaps' in the context of order blocks?
-Fair value gaps are important because they indicate the intention of price action. They can signal potential areas of support or resistance and are used to confirm the strength of an order block.
Can you explain the concept of 'expansion phase candle' mentioned in the script?
-An expansion phase candle is part of a three-candle pattern where the second candle closes below the first candle's low in a bearish scenario, indicating a potential fair value gap and a strong momentum against the current price direction.
What is the significance of 'retracement' in the context of trading and order blocks?
-Retracement refers to the price moving back towards an order block after it has been traded. It helps in confirming whether an order block will hold or not by observing the price action and the creation or disrespect of fair value gaps.
Why is it a mistake to look at order blocks on lower time frames without context?
-Looking at order blocks on lower time frames without context can lead to incorrect assumptions about their strength and reliability. Higher time frames provide the overall direction and context, which are crucial for order blocks to hold.
How does the script suggest marking an order block for trading purposes?
-The script suggests marking an order block based on the fair value gaps. If a fair value gap overlaps with the low (wick) of the order block, mark the wick. If not, mark the body of the order block.
What is the 'context area' mentioned in the script and why is it important?
-A context area is an overall area where there is the highest probability of time frames below the daily for order blocks to hold. It is important because it provides a reliable area for trading decisions based on the strength of order blocks.
How does the script describe the process of confirming an order block?
-The script describes the process of confirming an order block by observing the retracement and the potential or actual creation of fair value gaps. If the retracement does not create a fair value gap or disrespects an existing one, it confirms the strength of the order block.
What role do 'swing highs' and 'swing lows' play in identifying order blocks and bias?
-Swing highs and swing lows are significant price points that indicate potential support or resistance levels. They help in identifying the direction of the market (bias) and in forming order blocks, especially in the context of bearish or bullish lacks.
Outlines
📈 Understanding Market Bias and Order Blocks
This paragraph introduces the concept of market bias and order blocks, which are crucial for trading success. It outlines a four-step process to analyze market trends effectively. The first step is identifying market bias, which is the general direction of the market. The script uses GBP/USD on a weekly timeframe as an example to demonstrate how to spot potential continuation patterns and bearish fair value gaps. The importance of context in understanding order blocks on different timeframes is emphasized, with a focus on how higher timeframes influence lower ones. The paragraph also touches on the significance of draw liquidity and how it affects the probability of order blocks holding.
📊 Marking Order Blocks and Relativity Theory
The second paragraph delves into the specifics of identifying and marking order blocks accurately. It explains that order blocks are not just any candles but have specific characteristics, such as forming after previous support or resistance levels. The paragraph clarifies how to mark an order block based on fair value gaps and the importance of context in trading, introducing the relativity theory. This theory stresses the importance of aligning trading decisions with higher timeframes, as they dictate the overall market direction. The summary also highlights the process of confirming order blocks on lower timeframes only after validating their alignment with higher timeframes.
🔍 The Role of Retracement and Fair Value Gaps
This paragraph discusses the concept of retracement in the context of order blocks and the critical role of fair value gaps. It explains how retracements can provide insights into the market's intention and how they can affect the probability of an order block holding. The paragraph emphasizes the importance of monitoring the creation and disrespect of fair value gaps as indicators of potential market movements. It also illustrates how expansion phase candles can signal the potential for a fair value gap, which is vital for planning trading strategies and confirming the validity of order blocks.
📉 Analyzing Order Blocks for Entry Confirmation
The fourth paragraph focuses on using order blocks for entry confirmation in trading. It describes how to analyze the retracement into order blocks and the significance of expansion phase candles in this process. The paragraph explains the strategy of waiting for a potential fair value gap not to be created or to be disrespected as a confirmation signal for trading decisions. It also provides examples of how to interpret the market's behavior when trading back into order blocks and the importance of understanding the market's story through order blocks to make informed trading choices.
📈 Recap and Importance of Retracement Analysis
In the final paragraph, the video script recaps the importance of retracement analysis when trading with order blocks. It reiterates the significance of expansion phase candles and potential fair value gaps in confirming the strength of an order block. The paragraph concludes by emphasizing that understanding the market's story through order blocks is essential for making high-probability trades, highlighting the importance of retracement and the removal of potential fair value gaps as confirmation for trading entries.
Mindmap
Keywords
💡Order Block
💡Bias
💡Fair Value Gap
💡Retracement
💡Expansion Phase Candle
💡Swing High/Low
💡Context Area
💡Relatively Theory
💡Wick
💡Draw Liquidity
Highlights
Introduction to the concept of order blocks and their significance in trading.
Explanation of the four steps to understanding order blocks: bias, order block definition, relativity theory, and retracement.
The importance of bias in determining the direction of the market and its relation to liquidity.
How to identify and utilize fair value gaps in trading strategies.
The concept of 'sweeping the high' and its implications for potential market movements.
Understanding the difference between a fair value gap and a wick in the context of order blocks.
The role of context areas in increasing the probability of order blocks holding on lower time frames.
Common mistakes traders make when using order blocks without considering higher time frame bias.
Defining order blocks and the criteria that make them high probability areas.
The process of marking order blocks correctly based on fair value gaps and wicks.
The significance of relativity theory in aligning order blocks with higher time frame analysis.
Why strong order blocks on lower time frames are less likely to hold without context from higher time frames.
The introduction of the retracement step as a new concept in understanding order blocks.
How retracement patterns can confirm or deny the strength of an order block.
The importance of expansion phase candles in predicting potential fair value gaps and market direction.
Strategies for confirming order blocks through the observation of retracement and fair value gaps.
Using order blocks to understand market bias and predict future price movements.
The final summary emphasizing the importance of understanding the basics of order blocks for effective trading.
Transcripts
I promise that after this video you will
know everything about order blocks and
that you will be better than your
competition now in order to achieve that
we are going to go over four steps the
first step is bias second step is what
is an order block third step relativity
Theory and the fourth step that I've not
gone over before on this YouTube is the
retracement all right again First Step
biy what is the bias again buyas is the
direction of the market also known as
overall the drawn liquidity so which PD
are we aiming for if we look at this
market right here GBP us do on the
weekly time frame we see we're coming
back into this weekly order block that
we see right there I'll explain later on
why it is indeed an order block after
that we see that we can reach for this
previous week low right there which is a
discount array overall we can also see
that we have been going lower and we
have been respecting those bearish fair
value gaps right there so we could
assume right here that we might want to
continue lower now to get a more clear
picture let's dive into the daily so on
The Daily right here we can see this
daily fair value Gap right there which
we are stinging into and whilst we are
stinging into that arguably just as
important we are potentially sweeping
that high how do we know that we are
potentially sweeping that high whilst
coming above this high right here the
swing High we are not creating a daily
for right there and whilst we are above
it we are creating a wick right there do
you remember candle science kandle
science states that a wick is actually
fair value gaps on the lower time frame
so what happens right there with that
wick on the lower time frame well we
possibly see something like this Fair V
up going higher and a fair V up going
lower right there showing that
manipulation that we actually want to
continue lower where the previous week
load that we had right there could be
the T markets so off of that daily F Val
Gap right there we could deliver lower
towards that previous week low right
here why is this important because this
creates a context area a context area
creates an overall area where you have
the highest probability of time frames
below the daily right here for order
blocks to actually hold so for lower
time frame order blocks to hold a big
mistake that I see often times is that
people without any context without any
bias go into the lower time frame find
any random order block and expect it to
hold does not work that way if you can
understand where the higher time frame
will most likely what's the highest
probability for the higher time frame to
move towards next then those order
blocks will perfectly fine hold until we
hit that draw liquidity so this line is
the draw liquidity now if we go into the
4our right there we need to know and
understand what is an order block order
block blocks are not just simple up
candles or Down Candles not every up
candle or down candle is an order block
there are certain rules to make that
order block really high probability but
the first thing is we want it to come
off of a previous support or resistance
level in other words our order block
should be formed of of a previous PD Ray
often times you will see order blocks
will be formed off of previous fair
value gaps or off of previous order
blocks that is exactly what we want to
see so for example whilst we continue
lower right here and we create this fair
value Gap right there we see that we
create an up candle right there whilst
coming back into that bearish fair value
Gap that is exactly the first step a
premium array right there where we can
continue lower from whilst coming back
into that Prem Ray we create an up
candle could also be consecutive up
candles
after we leave that fair value Gap again
and we continue lower we create a new
fair value Gap in the same lack as the
order block what does that mean a lack a
bearish lack in this case is from a
swing High towards a swing low the swing
low in this case is not super relevant
because if there's no swing low does not
matter as long as there's a swing high
that indicates that there's some kind of
lack a bearish lack the same when we
talk about a bullish lack if we have a
swing low and we do not have a swing
High yet perfectly fine as long as we
have a swing low so for example this
right here from That Swing Low there
right there is a bullish lack in that
lack so in this bearish lack right here
continuing lower we want to see a fair
value Gap being created after we have up
candle or up candles so consecutive up
candles then once we have the support
level that we can continue lower off we
have an up candle going into that and we
have that fair value Gap continuing
lower right there in the same lag as
that order block perfect we now have an
order block the only thing left for us
to do is to now Mark it correctly so how
do we mark an order block correctly or
any PD in general well if we talk about
an order block and the same goes for
mitigation block break block as well
then we want to Market based on the fair
value gaps meaning if a fair value Gap
is exactly overlapping with the low of
the order block right there in other
words the wick right there then we want
to Mark out the wick right there if the
fair value Gap so there's no fair value
Gap overlapping with the exact Wick low
right there of the order block then we
Mark out the body so to give you an
example if we were to look at this order
block right here then we were to Mark
out if we were to look at this order
block right here then we were to Mark
out the body instead because the wick
right here is not overlapping with any
fair value Gap the body does not have to
be overlapping with a fair value Gap
same goes for this order block right
here where the fair value Gap is
actually created quite late value Gap
sitting right there so this right here
is the order block because the wick is
not overlapping with a fair value Gap
can you see that the top of the wick
it's actually not overlapping with any
fair value Gap so we use the body
instead now why actually is that that is
because if we move very fast and we have
a wick overlapping with the exact fair
value Gap then this right here is the
sensitive area of the order block if we
do not have that Wick overlapping with a
fair value Gap like we saw in the
earlier examples that that means right
there that the body is the sensitive
area because the wick right here
actually already got traded back into
with for example like we see that down
candle so since there's no intention
anymore the sensitive part changes
towards the body right there so we
understand bias we have a good
understanding of what an order block is
in alignment with that bias as well so
the third step is the relativity Theory
and the relativity theory is essentially
whenever we look at different time
frames price action is always going to
be different so we need to make sure
that we have everything in context and I
mean in Context of the higher time frame
the higher time frame rules is in the
higher time frame is the strongest time
frame so if we look at the top left we
have the monthly the weekly Daily 4 Hour
1 hour 50 minute 5 minute and 1 minute
if I were to start off looking at order
blocks on the 15-minute time frame I
would not look at strong order blocks
unless they are in context of the one
hour and the 4 Hour and the daily and
the weekly and the monthly so here we
started off with the weekly time frame
right there understanding that the
weekly can continue lower we also then
went into the daily we then went into
the 4H hour I do not go into the 15
minute right here to look at a 15minute
order block that is for example sitting
right there this 15minute or block is
extremely low probability why because
it's not in context of the time frames
above it there is a 4H hour order block
just above this 15minute order block so
the order block on the higher time frame
on the time frame above the 15 minutes
will be the stronger order block it will
have the stronger magnet and we'll have
the stronger rocket as well so if we
want to create a retracement like we see
right here the most likely it will not
just be a retracement into this 15minute
order Block No it will actually be a
retracement into the 4H hour order block
that we see right there especially after
we create the fair value Gap this very
important to understand so you don't get
lost on the lower time frame so just
like we have done start on the higher
time frame then slowly work your way
down down and if there's already a 4H
hour order block then we don't need to
go into the 1 hour unless we sting into
that 4our order block right there and we
can now confirm the 4our order block on
the lower time frame again the first
three steps I have gone over before I
think a lot of people would argue I'm
already familiar with that the fourth
step right here is the retracement can
you see what this order block right here
has in common with for example this or
block and purely looking at the way we
retrace back into those order blocks so
this order block right there is created
off of this previous order block right
there as well but this bullish order
block right here does not hold and the
bearish order block does hold and
reaches actually the draw liquidity
quite fast right there why does that
happen that of course has to do with the
overall draw liquidity understanding
that bias on what we're doing as well
but a huge part of it is as well the
retracement similar to what we see right
here with this order block this order
block right there is created off of this
previous order block right there and the
previous fair value Gap that we see and
this order block right there has
something in common as to why it fills
with this order block that also filled
and that again all has to do with the
retracement which is where we also now
need to understand a fair value Gap
again those fair value gaps why are they
so important why do I almost in every
video I would argue go over fair value
gaps they tell you everything they tell
you the intention of price if there's a
fair value Gap in the market it
literally tells you what it potentially
wants to do it's for me extremely
important to pay attention to fair value
gaps so why do I mention that a fair
value Gap again to quickly go over it is
a three candle pattern we have the first
candle can do whatever it wants second
candle is always an expansion phase
candle what what is an expansion phase
candle well it's when the body of the
second candle actually in a bearish
scenario closes below the first candle
low that creates an expansion phase
candle the expansion phase candle has
the potential to create a fair value Gap
depending on what the third candle does
if the third candle stings back into the
first candle low then it does not create
a fair value Gap and the potential fair
value Gap is now not created if the
third candle stays below the first
candle low there's a fair value Gap now
why is this so important why do I
emphasize so much on those Basics
because they tell you everything it's
all in the basics the secrets are in the
basics because here whilst coming back
into this order block right there what
do we see we create an expansion phase
sitting right there so when we create
that expansion phase we have a lot of
momentum going against us in that order
block again again I like to use analogy
of those pushing hands bearish hands
push price lower bullish hands try to
push price higher if we have bullish
prices but there's a lot of bearish
hands right there that push price lower
which is seen through F gaps the
intention again of price action then the
retracement into that bullish PD Ray if
it does want to hold in the first place
will be a deeper re retracement so here
that expansion phase candle tells us
that's a bit suspicious is that going to
create a fair value Gap that's the next
step because now we need to create a
plan and the plan is the following when
we create an or block and we want to
know if that or block is truly going to
hold so we are now looking to confirm
that order block then we have gone over
the first three steps so we know what
that order block is now we're looking to
see is that or block actually going to
hold or not well right here when we
create an expansion phase candle back
going into the order block what we want
to see and what we want to wait for is
for the fair value Gap the potential
fair value Gap not to be created so what
does that mean again well when is this
fair value Gap this potential fair value
Gap right here not created when we trade
back into the first candle low so this
candle low right there if we trade back
into that on the next candle right here
with a wick then we do not create a fair
value going lower meaning the intention
to going lower is actually taken away so
we only have bullish intention because
the last that was created was off of
that order block right there so we can
confidently say that the probabilities
are that we do still want to continue
higher if that is not the case and we do
not close in that potential fair value
gap which I'll show you examples of in a
little bit then we get something like
this where we do create a fair value Gap
sitting right there when we have a fair
value Gap going against us into an order
block that's not a good sign that is
extremely bearish right there and that
is not a good sign if we still want to
continue higher because now what have we
added to our overall to-do list we could
argue well our to-do list has expanded
because now we have this fair value Gap
that we need to overcome first which is
resistance essentially if we want to
continue higher because if we now want
to reach these highs for example then we
have a premium array that will try to
stop us from actually reaching that high
where if we did not have that F Val Gap
we had nothing stopping us from reaching
that high so we could have done it a lot
faster so here if we still want to
continue higher we want to see this fair
value Gap getting disrespected first
meaning that we would love to see a new
fair value Gap right there
disrespecting that old fair value Gap
confirming that we still want to
actually continue higher so once we
sting into it and we actually continue
lower we are not all of a sudden
surprised no we already saw that coming
actually now before we go over this
order block let's see this order block
right here as well when we create this
order block off of this previous fair
value Gap right there and we continue
higher when we trade back into that or
block what do we see we have a potential
expansion phase candle right here as
well created so there could be a fair
value Gap right here that stings back
into that order block so what do we want
to do we want to confirm this again the
plan of action is we want to take away
the fair value Gap going against us that
can either be done by again trading back
into the first candle low right there
and when we trade back into that we can
simply confirm it like normal like
nothing happened and we can potentially
still look to continue higher if that
does not happen and we do create that
fair value Gap we want to see that fair
value Gap getting disrespected first so
here since we now trade back into that
first candle low we can simply confirm
our entry off of that 4H hour orlock
right there like normal and we can still
look for potential higher prices as well
now once we create this or block coming
com off the previous order block and we
create this fair value Gap right there
which confirms this order block now if
we want to trade back into that order
block what do we see again we see right
here that we have an expansion phase
candle created so when we have that
expansion phase candle there's a
potential fair value G so once we see
that we already know hey that's
suspicious I would not want to see that
so if we still want to continue higher
off of this order block right here then
ideally we want to take away the fair
value Gap meaning we want to trade back
into the first candle low whilst we are
creating the third candle or once the
fair value Gap is created we want to
disrespect that fair value Gap right
there which both does not happen we
actually respect the bearish fair Val
right there and that's exactly what we
again continue lower off of so this
order block we already know okay I don't
want to go into the lower time frame
don't want to look at anything because
that is low probability then this order
block the bearish order block is
actually really high probability that's
exactly where we want to look for our
entry confirmation now the same order
blocks can also help you in
understanding that bias for example on
the weekly daily if I can't really get
to a clear bias these order blocks right
here on the 4our will tell me where
price might actually want to head
towards next let's look at this example
right here we have this order block
block right there which is created off
of fair value gaps and as well this
swing load so the sweeping of that swing
low right there and that order block
gets traded back into with what do we
see we see again this expansion phase
candle at this moment in time we do not
want to go into the lower time frame to
confirm this order block to potentially
continue higher no if we want to go into
the lower time frame we either want to
see on the next candle trade back into
the first candle low to take away the
fair value Gap or once it's created we
want to see a disrespect of that F value
gap which both we do not see and notice
as well when we trade off of that or
block and we try to push higher right
here we have this expansion phase candle
so one could argue well it's time to
rush in time to go into the lower time
frame but there's nothing confirmed just
yet because it's the same premise if we
take away this Fair Val right here to
the bottom hey that's interesting for
lower prices and now what have we done
we traded back into the fair value Gap
the bearish fair value Gap that we have
sitting right there and if the up
candles and a new fair value Gap going
lower we have created a new order block
sitting right there and that order block
is what we can now continue lower off of
on The Daily we know there is no order
block above that 4H hour order block so
we can safely look for that trade
opportunity right there as well so all
the steps are ticked off until we have
the retracement now let's look at the
retracement what do we see we could
argue that we create a potential
expansion phase right here going into
that or block so what can we wait for
well we can simply wait for this candle
to get traded back into right there
first candle High take away the F value
Gap and then continue lower off of that
then go into the lower time frame to
confirm it after that we continue lower
and we continue lower right here and we
see that those order blocks told us a
story as well they told us a story of
that buice it's again our job to Simply
understand the story this is arguably
the most important understanding when it
comes to or blocks it not necessarily
all right what are we coming off of yes
of course it's important like we
mentioned in the steps but it's the
retracement that makes it that tells us
how much confirmation we need and that
retracement is seen through those
expansion phase candles when we take
those away and we take the potential
fair value gaps away that is high
probability all right perfect thank you
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