Order Blocks Explained: 3 Best Strategies Revealed
Summary
TLDRThe video is an ultimate guide to mastering order blocks in trading, covering both basic and advanced techniques. It explains the concept of order blocks, their differences from support and resistance levels, and the rules for identifying valid order blocks. The video also introduces three high-probability trading strategies using order blocks: multi-timeframe confirmation, inducement traps, and breaker blocks. It emphasizes the importance of understanding market structure changes and using these strategies effectively for consistent profits. The guide serves as a comprehensive resource for traders at all levels, aiming to leverage order blocks for successful trading.
Takeaways
- 📊 Order blocks are areas on the chart where large institutions, known as smart money, enter the market, causing significant price movements.
- 🔵 Bullish order blocks (buy orders) and 🟣 bearish order blocks (sell orders) are identified based on price action and inefficiencies, with different colors used for clarity.
- 🚫 Order blocks differ from support and resistance: they're thicker zones and typically valid for one retest, while support and resistance can be used multiple times.
- 📉 A valid order block must create an inefficiency or gap between candlesticks, indicating imbalance in the market.
- ⛔ Once an order block is touched or tested, it is no longer valid for future trades, unless using specific strategies.
- 📐 To confirm a valid order block, it must lead to a break of structure (BOS) or a change of character (CHOCH) in the market trend.
- 🔍 Strategy 1 involves multi-timeframe confirmation, starting from a higher timeframe to find valid order blocks and using a lower timeframe to confirm reversals with patterns like bearish engulfing.
- 🎯 Strategy 2 uses inducement traps, where minor key levels above major order blocks often induce traders to enter prematurely, leading to a retest of the major order block.
- 📉 Strategy 3 focuses on breaker blocks, where previously valid but broken order blocks act as potential resistance levels for new short positions.
- 🛠 SimpleFX is promoted as a versatile trading platform, offering a $40 bonus with a minimum deposit, along with integrated tools like TradingView for streamlined trading.
Q & A
What is the main topic of the video?
-The video provides an Ultimate Guide to mastering order blocks in trading, including both basics and advanced techniques.
What are the two types of order blocks?
-The two types of order blocks are bullish order blocks, which are caused by large buy orders, and bearish order blocks, which are caused by large sell orders.
How do order blocks differ from support and resistance levels?
-Order blocks are formed based on significant price movement, while support and resistance levels require prior rejections to form. Additionally, order blocks are usually drawn as thick zones, whereas support and resistance levels are drawn as thin zones or lines.
What are the three rules for identifying a valid order block?
-The three rules are: 1) It must create a gap or inefficiency. 2) It must remain unmitigated or untested. 3) It must lead to a break of structure or a change of character.
What is the significance of inefficiency in identifying order blocks?
-Inefficiency, also called imbalance, refers to a gap between candles that indicates a potential order block. It helps traders distinguish between valid and invalid order blocks.
What does the term 'change of character' mean in trading?
-A 'change of character' occurs when the market structure shifts from an uptrend to a downtrend, or vice versa, marked by the price breaking previous highs or lows.
What is the multi-timeframe confirmation strategy?
-In the multi-timeframe confirmation strategy, traders identify an order block on a higher timeframe and wait for confirmation of a price reversal on a lower timeframe, such as through a bearish engulfing candlestick pattern.
What is an inducement trap in trading?
-An inducement trap involves a minor key level forming near a major order block, where traders expect a bounce at the minor key level, but the price breaks this level and retraces to the major order block before reversing.
What is a breaker block?
-A breaker block is a previously valid order block that has been broken. It can act as a potential resistance level where the price may reject after retesting the broken order block.
What is the role of large institutions, often referred to as 'smart money,' in the formation of order blocks?
-Large institutions or 'smart money' often trade with significant capital, causing noticeable price movements that form order blocks when they enter or exit positions.
Outlines
📊 Mastering Order Blocks: The Ultimate Guide
This paragraph introduces the video as an 'Ultimate Guide to mastering order blocks,' aimed at both beginner and advanced traders. It highlights the significance of order blocks in trading and promises an in-depth look at various concepts and three high-probability strategies for trading with order blocks. The video is presented as a complete masterclass that covers everything from basics to advanced techniques, designed to help traders achieve consistent profits.
📉 What Are Order Blocks? An Introduction
Order blocks are areas on a price chart where large institutions like banks have placed significant trades, often leading to sharp price movements. These areas, referred to as smart money, are critical for traders to identify as they present potential trade opportunities. There are two types of order blocks: bullish, created by large buy orders, and bearish, created by large sell orders. The paragraph explains the difference between order blocks and traditional support/resistance levels and the importance of identifying these blocks correctly for successful trading.
📈 Key Differences Between Order Blocks and Support/Resistance
The paragraph explores the differences between order blocks and support/resistance levels. The first difference is how they form: order blocks form after significant price movements, while support/resistance requires multiple rejections. Secondly, order blocks are drawn as thick zones, while support/resistance levels are thin. Finally, order blocks are usually one-time use, while support/resistance levels can be tested multiple times. The paragraph also introduces the concept of confluence, where order blocks and resistance levels overlap, increasing the likelihood of a price reaction.
🔍 How to Identify Valid Order Blocks
The paragraph provides three essential rules for identifying valid order blocks: 1) The presence of a gap, called inefficiency or imbalance, in price movements. 2) The order block must be unmitigated (untouched by price) to remain valid. 3) The order block must lead to a break of structure or change of character in the market. Examples are given to show how these rules apply, with charts illustrating upward movements and gaps, and how to correctly draw order blocks using specific candles.
📉 Market Structure: Break of Structure vs. Change of Character
This paragraph explains two critical terms: break of structure and change of character. In an uptrend, a break of structure occurs when the price breaks previous highs, continuing the trend. A change of character happens when previous lows are broken, indicating a shift from an uptrend to a downtrend. These concepts are essential in understanding how market trends form and reverse. The paragraph then ties these terms back to order blocks, noting that a valid order block must either cause a break of structure or a change of character.
🛠️ Practical Application: Identifying Order Blocks
Expanding on the previous rules, this section provides more chart examples of how order blocks form in real-market scenarios. It walks through identifying both bullish and bearish order blocks by analyzing inefficiencies, and how break of structure or change of character validates them. The paragraph highlights the importance of waiting for price development before drawing order blocks and notes that multiple structures (small and large) can influence the validity of an order block, making it essential to track the market's broader context.
🚀 Strategy 1: Multi-Timeframe Confirmation
The first trading strategy discussed involves using multi-timeframe confirmation. The trader identifies an order block on a higher time frame, then switches to a lower time frame to confirm bearish or bullish momentum before entering a trade. A favorite confirmation method is the bearish engulfing candlestick pattern. Once a confirmation pattern is found, the trader places a stop loss above the order block and aims for a take-profit level at twice the stop-loss distance. The strategy emphasizes waiting for retracement to the order block and using multiple time frames for greater accuracy.
📉 Strategy 2: Inducement Traps
This strategy focuses on 'inducement traps,' where a minor key level forms near a major order block. Large institutions push the price past the minor level, triggering stop losses and enabling them to re-enter at the order block for a better price. Traders can exploit this by placing a buy order in the order block zone. The setup works because the inducement level lures in traders, who then get stopped out as the price retraces to the order block, allowing for a profitable trade. Examples illustrate this strategy in action.
🔄 Strategy 3: Breaker Blocks
Breaker blocks are previously valid order blocks that have been broken. Once an order block is broken, it may act as a new resistance level, giving traders an opportunity to open short positions. The price often retraces to the breaker block before rejecting it again. This strategy is typically a one-time use, as its effectiveness diminishes after the price tests the level. The paragraph provides a detailed example of how a bullish order block was invalidated, broke down, and then provided a shorting opportunity when price retraced to it.
💡 Wrapping Up: How to Trade Order Blocks
The conclusion reinforces the importance of understanding and applying the strategies discussed in the video. It invites viewers to use these strategies in real trades, promoting a partnership with SimpleFX, a trading platform that integrates TradingView for analysis and trade execution. The platform’s features and a special $40 bonus for new users are highlighted as incentives for trying out the strategies. The video ends with a recommendation for beginners to start with a simpler trading strategy before diving into order block techniques.
Mindmap
Keywords
💡Order Block
💡Smart Money
💡Break of Structure
💡Change of Character
💡Inefficiency/Imbalance
💡Mitigation
💡Confluence
💡Multi-Timeframe Confirmation
💡Inducement Trap
💡Breaker Block
Highlights
Introduction to mastering order blocks and their importance for traders.
Definition of order blocks as key areas where significant capital enters the market, often by large institutions.
Difference between bullish (buy orders) and bearish (sell orders) order blocks, with color coding suggestions.
Clarification on how order blocks differ from support and resistance levels based on formation, drawing, and retests.
Explanation of the importance of gaps (inefficiencies) in identifying valid order blocks.
Key rule: An order block must remain untested to be considered valid for trading.
Order blocks must lead to a break of structure (BOS) or change of character (CHOCH) to be valid.
Detailed explanation of market structure with examples of uptrends, downtrends, break of structure, and change of character.
Introduction to multi-timeframe confirmation strategy: using higher and lower time frames to validate order blocks.
Explanation of the inducement trap strategy: how smart money manipulates key levels near order blocks.
Introduction to breaker blocks: previously valid order blocks that can act as resistance or support after being broken.
Example-based walkthrough of how to trade breaker blocks using risk management techniques.
Using bearish engulfing candlestick patterns for confirmation in the multi-timeframe strategy.
Tips on setting stop loss and take profit levels for high reward trades in each strategy.
Summary of the three key strategies: multi-timeframe confirmation, inducement traps, and breaker blocks.
Transcripts
hey traders in this video I've put
together the Ultimate Guide to mastering
order blocks we'll dive deep into both
the basics and Advanced Techniques
whether you're a beginner or an advanced
Trader be sure to watch the entire video
so you can understand every Concept in
detail I'll also reveal three high
probability trading strategies using
order blocks by the end of this guide
you'll have a solid understanding of how
to leverage order blocks for consistent
profits overall this video serves as a
complete masterclass on trading with
order blocks so let's dive in here are
the topics covered in this
video first let's start by understanding
what an order block is an order block is
a key area on the chart where
significant amounts of capital have
entered the market typically by big
Banks or large institutions often
referred to as smart money since they
trade with substantial Capital their
actions usually cause noticeable price
movements on the chart so if you notice
the price moving sharply from a specific
area like this one it could indicate
that smart money has taken a position
large buy orders are needed to drive the
price up this quickly the initial area
where these trades are executed is known
as an order block order blocks can be of
two types bullish order blocks which are
caused by large buy orders and bearish
Order blocks which are caused by large
sell orders for this video I'll color
bullish order blocks as blue and bearish
Order blocks as purple but of course you
can use any color you want once an order
block is identified it can provide
potential trade opportunities as the
price tends to retest and bounce after
hitting that area for example if you
bought at the order block here it would
have resulted in some nice profits now
you might be asking yourself isn't this
the same as support and resistance while
both order blocks and support resistance
are considered key levels they are not
the same as there are major differences
between them first difference is how
they form order blocks are formed based
on significant price movement on a chart
for example if the price moves
significantly from an area you can draw
an order Block in contrast support and
resistance levels require prior
rejections to form for example if the
price once rejected this level here and
another rejection happened here then we
can draw support level second difference
is how they are drawn on the chart order
blocks are typically drawn as thick
zones or areas while support and
resistance levels are usually drawn as
lines even if they're drawn as zones
they're usually thin zones not as thick
as order blocks third difference is the
number of retests order blocks are
typically a one-time use meaning if they
are retraced once they're done you can
not use them multiple times in contrast
support and resistance levels can be
retraced multiple times while order
blocks and support resistance differ
they can be used together for example if
an order block forms while the price is
also at a resistance level this is
called a Confluence finding this kind of
setup is ideal as the price has a higher
chance of reacting to an area of
Confluence now before we can trade using
order blocks we need to know how to
correctly identify them remember in our
very first example I mentioned that if
the price moves significantly from a
point we could draw an order block well
it's not quite that simple a significant
price move doesn't automatically mean
that an order block is present there are
specific rules that determine whether an
order block is valid so here are the
three important rules for a valid order
block these are crucial as you won't be
able to trade the strategy if you don't
get these down rule number one for a
price to be classified as an order block
it must create some sort of Gap
afterward this Gap is what people refer
to as
inefficiency or imbalance so anytime you
hear these terms it simply means Gap
let's see an example so you can
understand better here we have two
similar price movements both moved
upward significantly however notice the
key difference the one on the left has a
gap between the first candle's upper
Wick and the third candle's lower Wick
while the one on the right doesn't have
it as the Wicks are intersecting with
the candle's full body this Gap is
what's called an inefficiency or
imbalance so even though both setups
show significant upward movement only
the left one counts as a valid order
block because there's inefficiency to
draw the order block take the first
candle before the inefficiency and draw
a rectangle over the full candle from
the top Wick to the bottom
Wick rule number two an order block
needs to be unmitigated order blocks are
generally a one-time use if the price
touches an order Block it's no longer
considered valid meaning it can't be
tested or retraced
for example let's say you spot a gap or
inefficiency in the price so you draw an
order block if you see the price or even
just a wick touching that order block it
means the order block is no longer valid
because it has now been tested while
there are strategies to reuse a tested
order block I'll cover that later in the
video but for now just remember that an
order block is generally a onetime use
rule number three the most important
rule is that an order block must lead to
a break of structure or a change of
character afterward now for those of you
who might not be familiar with these
terms I'll give a quick recap but if you
already know what they mean feel free to
skip ahead to the Tim stamp displayed on
the screen so basically we know that
markets have Trends uptrends and
downtrends let's take an uptrend as an
example during an uptrend the market
doesn't just move straight up instead it
moves in a structured way forming what's
called higher highs and higher lows
they're called higher highs because each
high is higher than the previous one and
higher lows because each low is also
higher than the previous one on the flip
side in a downtrend the price forms
lower highs and lower lows these are
called Lower highs because each high is
lower than the previous one and lower
lows because each low is also lower than
the previous one in a market structure
like an uptrend each time the price
breaks the previous highs and creates
higher highs like this it's referred to
as a break of structure now of course
markets don't stay in an uptrend Forever
at some point the trend will change this
shift happens when the previous lows are
broken leading to the formation of lower
lows remember before the break we have
higher lows but once the price breaks
those levels they become lower lows this
break of the previous lows during an
uptrend is called a change of character
why because it shifts the character of
the market from an uptrend structure to
a downtrend structure and the cycle
repeats itself during a downtrend the
price forms lower highs and lower lows
when the previous lows are broken this
is now referred to as a break of
structure in the future if the price
breaks the previous highs and forms
higher highs during this downtrend
that's called a change of character
because the price shifts from a
downtrend structure to an uptrend
structure so that was a quick overview
of what a break of structure and change
of character are now how does all of
this relate to order blocks for an order
block to be valid it must lead to either
a break of structure or a change of
character
afterward let's see an example in this
chart we see a significant upwards move
coupled with a gap or
inefficiency so there's a possible order
block here however this doesn't mean we
can immediately draw an order block as
we need to first see if the market forms
either a break of structure or a change
of character afterward right here we
notice that the price hasn't yet formed
a break of structure as it hasn't broken
these previous highs so we wait for the
price to develop further now once the
price does break this High forming a
break of structure that's when we can
draw our order block on the first candle
before the
inefficiency and again we see the price
move significantly upward coupled with
inefficiency followed by a break of
structure as the price forms higher
highs so this makes it another valid
order block that we can
draw now let's look at another example
in this chart the price is forming
higher highs and higher lows and we have
a possible order block here due to this
inefficiency however since the price
hasn't formed higher highs we can't
count this as a valid order block yet
after waiting some time the price moves
down and forms another possible order
block but this time it's a bearish one
this is shown by the significant
downward movement coupled with
inefficiency on this red candle then the
price breaks the previous lows of the
structure forming lower lows since it
made lower lows during this uptrend it
counts as a change of character and the
market structure has now shifted to a
downtrend so we'll focus on the latest
order block that aligns with the current
Trend which is this bearish order block
the previous bullish order block isn't
valid because the price didn't form
higher highs however this bearish one is
valid because it resulted in a change of
character here we see a significant
upward movement coupled with
inefficiency suggesting a possible order
block however since the price hasn't
formed a break of structure yet this
order block isn't valid at this point
after some time we notice the price
moves downward and then back up forming
another inefficiency indicating another
possible order block this time the price
does form higher Highs but it's within a
smaller structure this makes it a valid
order block within this smaller
structure however if we look closely we
also see that the price made higher
highs within the previous larger
structure this means the earlier
possible order block is now a valid
order block as well since the price
formed higher highs within that larger
structure so when drawing order blocks
it really depends on which structure the
order blocks are formed within so to
recap the three rules to identify a
valid order block are first it must
create a gap also known as inefficiency
or
imbalance second it must remain untested
or unmit ated third a break of structure
or change of character must occur
afterward identifying order blocks is a
great skill but the real excitement
comes when you start using them in a
trading strategy now I'm about to reveal
three order block strategies that can
take your trading to the next level
strategy number one multi-timeframe
confirmation for this first strategy
start by finding an order block on a
higher time frame in this example we're
using the Bitcoin USD 4H hour chart at a
glance we can see two significant price
movements the first one is moving upward
here and the second is moving downward
here both of them also have
inefficiencies so we have two possible
order blocks a bullish one and a bearish
one however let's double check if these
two potential order blocks are actually
valid for this bullish one the price did
move upward with inefficiency but it
didn't form a clear break of structure
plus the price retested it afterward so
it's no longer unmitigated for the
bearish order block the price clearly
formed lower lows creating a break of
structure plus it's unmitigated So based
on our analysis only this bearish order
block is valid once you've identified
the correct order block the next step is
to wait for the price to retrace back to
that order block the moment the price
touches the order block we now move on
to the next step of the strategy which
is confirmation we're trying to confirm
whether the price will actually bounce
off this order block to do that we
switch to a lower time frame like the
15-minute chart on the 15minute chart
we're looking for any signs of bearish
momentum to prove that the price will
reverse from this order block you can
use any type of confirmation tools
whether it be an indicator like the ma
CD finding a bearish Candlestick pattern
or spotting a change in Market structure
basically anything that confirms that
the price is likely reversing from this
level now my favorite confirmation tool
is the bare bearish engulfing
Candlestick pattern as it's simple yet
effective for giving early signals a
bearish engulfing pattern occurs when a
smaller bullish candle is immediately
followed by a larger bearish candle that
completely engulfs the previous one this
indicates a potential reversal from
bullish to bearish once you spot it you
can open a cell position right after the
pattern has formed then place your stop
loss slightly above the order block and
set your takeprofit at 2x the size of
your stop loss as you can see this
strategy can lead to Some solid profits
here's a cheat sheet that you can use
when trading on multiple time frames if
your high time frame is the weekly use
the 4H hour as your low time frame if
your high time frame is the daily use
the 1 hour as your low time frame if
your high time frame is the 4H hour use
the 15minute as your low time frame if
your high time frame is the 1 hour use
the 5 minute as your low time frame and
that's all you need for strategy number
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strategy number two inducement traps an
inducement trap is a specific setup that
involves a minor key level forming near
a major order block take this example we
have a major order block forming below
and a minor key level forming above it
due to multiple rejections this minor
key level is also referred to as an
inducement the strategy is called an
inducement trap because in many cases
the price will break this minor key
level only to retrace to the major order
block before reversing back up traders
who bought at this seemingly obvious key
level expecting a bounce would often get
stopped out instead so if you spot a
setup where there's a minor key level
sitting above a major order block you
can cue a buy order in the middle of
that major order block this way your buy
order only gets triggered if the price
touches the order block offering you a
high reward trade but if the price
doesn't reach the order block that's
perfectly fine because no position was
opened while this may seem like a random
and specific pattern it's actually more
common than you might think and there
are logical reasons to why this setup
works first let's understand that large
institutions want to enter the market at
an ideal price but due to their massive
Capital they can't do so without moving
the price unlike retail traders who can
enter positions easily smart money
couldn't enter positions that easily as
their large orders would push the price
up causing their average entry price to
be higher so in order to enter at a
lower price they use inducement levels
after entering the market and forming an
order block they push the price back
down to that order block by traing
traders who bought at inducement levels
expecting a bounce this is effective
because Traders often Place stop losses
just below key levels meaning just a
little bit of selling pressure could
trigger these stop losses which in turn
leads to more selling this allows smart
money which entered at the previous
order block to re-enter at that price
driving the price back up so that's the
basic logic behind why this pattern
works now let's look at a real example
in this chart the price moves sign ific
L upwards with an inefficiency followed
by a break of structure making this a
valid order block after this upward
movement we identified an inducement
Zone as the price formed multiple
rejections at this support level now
because we have a setup where there's a
major order block below and a minor
support level near it this could be a
potential inducement trap this means the
price could break the minor support
level and retest the order block so we
place a limit byy order in the middle of
the order block and wait as you you can
see the price moved downward broke the
inducement level and triggered our buy
order at the order block after the order
is triggered we place a stop loss just
below the order block and set our
takeprofit at 2 to three times the size
of the stop loss you could also Target
the inducement Zone as your takeprofit
as you can see this trade turned out to
be profitable strategy number three
breaker
blocks in the very first part of the
video I mentioned that order blocks are
typically a one time use but there's
actually a way to take advantage of
order blocks that have been broken this
strategy is called breaker blocks what
is a breaker block a breaker block is a
previously valid order block that has
been broken once an order block is
broken the price May retrace back to
that level and it can act as a potential
resistance level where the price May
reject this level this gives us an
opportunity to short at the breaker
block keep in mind that breaker blocks
are typically onetime use after the
price breaks and retests the level their
effectiveness is usually done let's
break down this chart example in this
chart we can see the price move
significantly upward paired with
inefficiency we also see the price made
higher highs here so we can draw an
order block at this candle but then the
price moved downward and actually broke
the order block this move also created a
change of character as the price broke
below the previous lows indicating that
the trend has shifted from bullish to
bearish now as the price retraces back
toward the previous order block it can
now act as a potential resistance Zone
this is a prime area to open a short
position then place your stop loss
slightly above the breaker block and set
your takeprofit at two times the size of
the stop loss and as you can see the
price rejected this order block hit our
Target and resulted in a nice profit now
that you know these strategies it's time
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simple effects for helping me make this
video possible that's it the exact
step-by-step process to find and trade
order blocks however if you're a
complete beginner with no trading
experience I recommend you try a
different strategy first in this video I
explain the exact strategy any beginner
can use to start making consistent
profits from Trading thanks for watching
and I'll see you in the next one
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