How to Identify Best Order Blocks to Trade?
Summary
TLDRThis video delves into the intricacies of order blocks in trading, explaining why some are respected by the market while others are ignored. After backtesting over 100 order blocks, the presenter outlines the basic rules for identifying high-quality order blocks and discusses the conditions that increase their win rate. The video includes a simple trading strategy for order blocks, backtesting results, and tips for trading during volatile market conditions. It emphasizes the importance of market structure, volatility, trend, and confirmations in lower time frames for successful order block trading.
Takeaways
- 📈 Order blocks are areas of interest for trading opportunities, and their effectiveness can vary based on certain market conditions.
- 🔍 The video presents a backtest of over 100 order blocks to identify characteristics that make them more likely to be respected by the market.
- 📝 Three main rules for identifying a valid order block are: it must create inefficiency, lead to a break of structure or change of character, and be unmitigated (one-time use).
- 💡 Inefficiency is characterized by drastic moves creating gaps between the shadows of the candles, signaling potential trading opportunities.
- 🎯 The trading strategy involves placing orders at the beginning of the order block zone with a stop loss at the end, targeting twice the stop loss for profit.
- 📊 A backtest of the trading setup on the euro dollar pair in a one-hour time frame showed a 43% win rate and a 47% increase in the initial account size.
- 🤔 The importance of considering market structure, volatility, spread, market trends, and recent order blocks is highlighted for successful order block trading.
- 🌐 Market trends and the freshness of order blocks play a role in their success, with trending markets and recent order blocks being more effective.
- 🔑 Confirmations in lower time frames are crucial to avoid unnecessary losses and to trade with more confidence.
- 📉 The video provides examples of how to interpret market patterns around order blocks, such as gaps and liquidity zones, to make informed trading decisions.
- 🔄 The strategy is not limited to any specific time frame or currency pair, but traders are advised to perform their backtesting to find the most suitable application.
Q & A
What is the main topic of the video?
-The main topic of the video is the concept of order blocks in trading and the characteristics that make them effective or ineffective in the market.
What did the creators do to understand order blocks better?
-The creators backtested more than 100 order blocks under different conditions to identify the characteristics of high-quality order blocks that are respected by the market.
What are the basic rules for identifying a valid order block according to the video?
-The basic rules for identifying a valid order block are that it must create inefficiency, lead to a break of structure or a change of character, and be unmitigated (one-time use).
What is meant by 'inefficiency' in the context of order blocks?
-Inefficiency refers to drastic moves in the market that create gaps between the shadows of candles, indicating significant market movement.
How does the video define a 'break of structure or change of character' in the market?
-A break of structure or change of character is the first clue the market gives about whether it intends to continue in the same direction or reverse, indicating a potential shift in market trend.
What is the strategy for trading order blocks as described in the video?
-The strategy involves identifying a valid order block, placing an order at the beginning of the order block zone, and setting a stop loss at the end. The target is to achieve two times the stop loss range for profits.
What was the win rate of the backtested order block trading setup?
-The win rate of the backtested order block trading setup was 43 percent.
What factors are considered when trading order blocks to increase the win rate?
-Factors considered include market structure, market volatility and spread, market trends, and recent order blocks confirmations in lower time frames.
Why are fresh order blocks more effective according to the video?
-Fresh order blocks are more effective because the market constantly changes direction, and waiting too long for the price to tap into an order block can lead to a losing trade as demand and supply dynamics shift.
How does the video suggest using confirmations in lower time frames for trading order blocks?
-Confirmations in lower time frames are used to avoid unnecessary losses when the market ignores order blocks and to trade more confidently with a solid entry reason.
What is the importance of market volatility and spread when trading order blocks?
-Market volatility and spread are important because they affect the likelihood of winning trades, with most winning trades happening on highly volatile days and during specific trading sessions. A high spread can cause missed opportunities or false stop losses.
How does the video suggest traders should deal with losing trades in the context of order blocks?
-The video suggests that encountering a losing trade does not necessarily mean there was an error in analysis, as no strategy always works due to the uncontrollable nature of the market.
Outlines
📊 Introduction to Order Blocks and Trading Strategies
This paragraph introduces the concept of order blocks in trading and the importance of understanding why some order blocks are successful while others are ignored by the market. The speaker explains that they have backtested over 100 order blocks to identify the characteristics of high-quality order blocks. They also mention the basic rules for identifying a valid order block, which includes the creation of inefficiency, a break of structure or change of character, and the unmitigated nature of order blocks. The paragraph concludes with an overview of the video's content, which will include a simple setup for trading order blocks, backtesting results, and conditions for high probability order blocks.
📈 Analyzing Market Structure and Order Block Patterns
The second paragraph delves into the analysis of market structure patterns and how they relate to order blocks. It discusses the impact of gaps and liquidity on the effectiveness of order blocks, as well as how certain patterns can signal potential trading opportunities. The speaker provides examples of these patterns, such as gaps below the first order block and the grabbing of liquidity under equal lows or highs. The paragraph also touches on the importance of considering market volatility, spread, and trends when trading order blocks, emphasizing that order blocks are more successful in trending markets and during highly volatile sessions.
🔍 Confirmation Strategies and Trading Order Blocks
The final paragraph focuses on the importance of confirmation in lower time frames when trading order blocks. It explains that confirmations can save traders from unnecessary losses and increase confidence in trades. The speaker outlines the steps of the trading strategy used for backtesting order blocks, including identifying a valid order block, placing orders, and setting stop losses and profit targets. The paragraph also discusses common price action setups that can serve as confirmations for trading order blocks, such as changes of character and retracement levels. The speaker concludes by emphasizing the need for backtesting these strategies to find the most suitable pairs and conditions.
Mindmap
Keywords
💡Order Blocks
💡Inefficiency
💡Break of Structure
💡Unmitigated
💡Win Rate
💡Market Structure
💡Market Volatility
💡Spread
💡Market Trend
💡Confirmation
💡Risk Management
💡Backtesting
Highlights
Order blocks are identified as areas of interest for trading opportunities.
Over 100 order blocks were backtested to determine what makes some effective and others ignored by the market.
High-quality order blocks are respected by the market under certain repetitive patterns.
Basic rules for trading order blocks include identifying inefficiency, a break of structure, and unmitigated order blocks.
A valid order block must create inefficiency, lead to a structural break or character change, and be unmitigated for a one-time use.
A trading strategy for order blocks involves placing orders at the beginning of the order block zone with a stop loss at the end.
Backtesting results showed a 43% win rate and a 47% increase in the initial account size despite a less than 50% win rate.
Certain conditions can significantly improve the chance of winning trades with order blocks.
Market structure, volatility, spread, trends, and recent order blocks are key factors for identifying high-quality order blocks.
Order blocks with gaps and another valid block underneath can indicate a high chance for price movement.
Breaking below an order block does not necessarily indicate a reversal due to potential liquidity grabs for future movements.
Highly volatile days and sessions are optimal for trading order blocks, with most winning trades occurring midweek.
A narrow spread is crucial for order block trades to avoid missing opportunities or false stop losses.
Order blocks have a higher success rate in trending markets and are more effective when fresh.
Confirmations in lower time frames are essential to avoid unnecessary losses and trade with confidence.
The order blocks trading strategy is adaptable to any time frame and requires backtesting for suitability with different currency pairs.
Common price action patterns are used as confirmations for trading order blocks, enhancing entry strategies.
Profits can be maximized with a technique of repositioning the stop loss under new higher lows in the market structure.
Understanding and applying these strategies can lead to more effective trading and potentially higher returns.
Transcripts
hey guys and welcome to another episode
order blocks are considered interesting
areas to execute trading opportunities
but do you know why some of the order
blocks work perfectly fine While others
get ignored by the market to answer this
question we backtested more than 100
order blocks under different conditions
to find out the characteristics of high
quality order blocks that are being
respected by the market
we applied multiple rules to C if they
really increased the win rate of order
blocks and gathered some of the most
interesting results
we concluded that order blocks work
under certain conditions when some
repetitive patterns happen in the market
so in this video first we will explain
the basic rules in a simple setup for
trading the order blocks and we will
show you the back testing results
second we will describe the conditions
required for high probability order
blocks and how to increase the win rate
so guys if that's something you are
interested in make sure to smash the
like button to show your support and
subscribe to our Channel if you are new
since we publish many Advanced trading
Concepts
[Music]
thank you so first let me explain some
of the primary rules about order blocks
in the smart money Concepts
basically we consider the last candle
that created the inefficiency as the
order block Zone which we believe that
the decisions are made during this
candle
sometimes order blocks are at the start
of an impulsive move and sometimes in
the middle of the movement in the form
of a candle with the same or opposite
color
we have three major rules for
identifying a valid order block first it
must create inefficiency
inefficiency occurs when we have drastic
moves that create gaps between the
Shadows
these are examples of efficient and
inefficient moves
second it must lead to a break of the
structure or a change of character
a break of structure or change of
character is the first clue that the
market is telling us whether it intends
to continue in the same direction or
reverse
third it must be unmitigated
order blocks are one-time use so we only
look for trading opportunities when the
first time price Taps into an order
block
here on the Euro dollars 15 minute chart
let's spot the order blocks
starting from the left these are the
areas where we have clear inefficiency
on the chart
so we Mark the candles that created the
inefficiency as our order blocks if they
lead to a break of structure or change
of character so all of them consider
valid order blocks according to our
rules
now let me explain the steps of the
trading strategy we used for the back
testing order blocks
the rules for this trading setup are
easy
identify a valid order block
place your order at the beginning of the
order block Zone and put your stop loss
at the end
we target two times our stop loss range
for the profits this way even with a 34
win rate we will still be at break even
we have back tested this trading setup
100 times on euro dollar pair in the one
hour time frame
for the back testing we use Trader Edge
software which allows us to save so much
time while back testing our strategies
we set our initial account size at ten
thousand dollars with two percent risk
targeting four percent profits
now let me show you the results we have
got
these are the 100 order blocks we have
spotted on the chart the green order
blocks you see are the trades that hit
our one to two Target and ended up
winning
the red order blocks are the trades that
ended up losing and the gray order
blocks are the ones the market did not
trigger and finally we canceled the
trades
so these are the back testing results we
have got from 100 order blocks setup 28
did not triggered 41 ended up being a
losing trade and we have won 31 setups
our win rate was 43 percent and we
suffered a 10 maximum drawdown
Although our win rate was less than 50
percent this trading setup raised our
initial account size by 47 percent
in the back testing we have realized
that when certain conditions a company
order blocks the chance of winning the
trade significantly improves
we also noticed repetitive patterns form
on the chart that dramatically increases
trading returns
so let me explain to you what conditions
are required to identify a high quality
order block but before we continue as
always please smash the like button to
show your support since this video took
a long time to make for our team also if
you have any questions please ask them
in the comments since we do our best to
answer them all
the factors that should be considered
when trading order blocks are summarized
in four categories including Market
structure Market volatility and spread
market trends and recent order blocks
confirmations in lower time frames
let's start with the market structure
let me show you some of the most common
market structure patterns that happen
every day
here we have a valid order block and a
potential trading opportunity to go long
but looking at the left side we can spot
this gap between the candles precisely
below the first order block and another
valid order block Zone here
now there is a high chance for the price
to come and fill the Gap grab the
liquidity below the first order block
and continue pushing up when it Taps
into the second order block
so when this pattern is formed and we
have a gap and another valid order block
precisely under the first one we give
the first order block minus one point
for trading also remember that breaking
below the first order block does not
necessarily mean a reversal is coming
since there is a high chance that this
break is just a liquidity grab for
future movements
on the contrary look at the second
pattern
here we have a valid order block and
looking at the left we can see that this
move has swept the liquidity under these
equal lows which can fuel future
movements
so when this pattern is formed and we
have an order block that grabs the
liquidity under or above the equal lows
and highs we give it a plus one point
for trading
the third pattern is similar to the
second one imagine we have an order
Block in front of the market as the
price approaches this level it creates
support which retail Traders put their
stop loss under them
hence there is a higher chance for the
price to grab the liquidity under the
Equal lows and continue moving to the
upside when it reaches the order block
Zone so let me show you some real chart
examples to highlight the point
here we have euro dollar in a one hour
time frame we can spot this valid order
block that created inefficiency and
break of structure but looking at the
left side we can spot the support that
rejected the price multiple times so
there is a lot of liquidity gathered
below this level
also we have gaps exactly under this
Zone and another valid order block so
there is a high chance for the price to
break below this liquidity Zone to fill
the Gap and continue pushing up when it
Taps into the second order block
here is another example you could have
taken either of these candles as order
blocks we have a clear Gap break of
structure and a lot of liquidity
gathered below these equal lows and this
mitigated order block
so once the price breaks below this
higher low some Traders might take it as
a change of character but looking to the
left side we can notice a clear Gap and
a valid order block exactly under this
level
so there is a higher chance that this
move is going to be a liquidity grab and
we are still identifying this Market as
bullish
now look at this bearish example here in
euro dollar one hour time frame we have
an obvious downtrend we can spot this
order block that created a clean
inefficiency and break of structure but
the interesting point about this order
block is that the start of this move is
a liquidity grab so this is plus one
point trading opportunity
but here's an important point every time
you encounter a losing trade it does not
necessarily mean that there was a
certain error in your analysis remember
no strategy always works because we
can't control the market
the second Factor you should consider
when trading order blocks is the market
volatility and spread when we analyze
the back testing results we notice that
most winning trades happen on the highly
volatile days in sessions usually on the
first and last day of the trading week
the market suffers from low liquidity
that is why the majority of winning
trades happen in the midweek also a pair
like the euro dollar is best to trade
during the highly volatile time of the
day such as London and New York sessions
otherwise trading won't make sense
because we will not witness the
movements we want to see in the market
another important factor in trading
order blocks is how to deal with the
spread
many times the market reacts to order
blocks within a pip so having a high
spread on a pair will make you miss many
winning trades or trigger the stop loss
when the price did not even touch it
the third Factor influencing the success
of order blocks is the market Trend and
their freshness
order blocks have a higher success rate
in trending markets than in the ranging
scenario
so as a result it is better to trade the
order blocks that are in the direction
of the dominant Market trend
also trading recently printed order
blocks are more accessible and more
effective because the market constantly
changes Direction and spending too much
time waiting for the price to tap into
the order block often leads to a losing
trade
since the demand and Supply are
constantly fighting to take control
trading fresh order blocks have higher
win rates
here on the euro dollar when we have a
clear trending Market see how often the
market prints fresh order blocks rejects
them and continues pushing up
on the contrary look at another example
here we have a valid order block Zone
but before price Taps into this area
Market have made a lot of demand zones
and broke them to the downside some
Traders might take these areas as
liquidity grab and put their buying
positions on the order block
but the point is that the supply has
taken control
and trading this order block without
confirmation won't be effective
so that is why the confirmation in the
lower time frames is the third Factor
you should consider when trading order
blocks
confirmations save us from a lot of
unnecessary losses when the market
decides to ignore the order blocks also
having a solid entry reason as
confirmation in our trading Arsenal
makes us trade more confidently
the order blocks trading strategy is not
limited to any time frames still after
we spot the order blocks in the higher
time frame we zoom in two time frames
lower to look for confirmations and
trading entries
so when we use four hour one hour and 15
minutes chart as our higher time frame
we look for entry reasons in 15 minutes
5 minutes and one minute respectively
you could use multiple price action
setups as confirmations for trading the
order blocks here are some of the most
common patterns we trade in the market
in the first step we wait for the market
to mitigate our higher time frame order
block and for Price action to show its
next move
now the first thing we are waiting for
to appear is a change of character
a change of character signals that the
short-term downtrend is over and the
price can start to move to the upside
so after the market makes a change of
character that is when we look to
execute our trade
usually we witness two common patterns
and this is the way we place our orders
the first pattern is when the change of
character move creates inefficiency and
a valid order block
so we place our order a spread size
above the order block and put our stop
loss a couple of Pips below the lowest
point of the zone
we use a simple technique for taking
profits to catch big risk to reward
ratios without even experiencing much
tension
if we end up being right and the price
starts pushing up
we will reposition our stop loss under
the market structure every time Market
makes a new higher low
this way we could let our trades run in
profits until we reach a higher time
frame Supply Zone and close the trade
the second pattern happens when we have
a change of character but there is no
inefficiency or gaps between the candles
so we place our trade with Aid of
retracement levels we put the
retracement tool from the start of the
change of character move to the end and
place a buy order in the middle of the
six one eight and seven eight six
retracement levels our stop will be a
couple of Pips below the swing low and
Target the next level of structure in
front of the price
remember that these trading setups are
not limited to any time frame or a pair
still you must do your back testing and
see which pair is most suitable for
these strategies
so guys if you have enjoyed this video
please give it a thumbs up to show your
support and subscribe to our Channel if
you are new
thanks for watching and see you in the
next episode
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