How to Identify Best Order Blocks to Trade?

Summary

This 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.