The "Order Block" Theory

Summary

This 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

00:00

📈 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.

05:01

📊 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.

10:03

🔍 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.

15:04

📉 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.

20:05

📈 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.

Keywords

💡Order Block

An 'Order Block' in the context of the video refers to a specific pattern in trading that signifies a high probability area where price action is expected to consolidate or reverse. It is not simply an up or down candle but follows certain rules, such as forming off a previous support or resistance level. The video emphasizes the importance of order blocks in understanding market bias and making trading decisions, using examples like the GBP/USD on the weekly time frame.

💡Bias

In trading, 'Bias' represents the direction in which the market is likely to move. The video script discusses how understanding the market bias is crucial for anticipating price movements. For instance, the script mentions analyzing the GBP/USD on a weekly time frame to determine if the market is likely to move higher or lower, which guides subsequent trading strategies.

💡Fair Value Gap

'Fair Value Gap' is a term used to describe a price area that the market has not yet fully traded through, indicating potential future price action. The video script explains that these gaps can signal the market's intention, such as a bearish or bullish sentiment. The concept is repeatedly emphasized throughout the script, highlighting its significance in trading analysis.

💡Retracement

A 'Retracement' in the video refers to the price moving back towards a previously established support or resistance level after a significant price move. The script explains that retracements can provide insights into the strength of an order block and its likelihood to hold during market movements, as seen in the discussion of how retracements relate to expansion phase candles and fair value gaps.

💡Expansion Phase Candle

An 'Expansion Phase Candle' is part of a three-candle pattern that can lead to the creation of a fair value gap. The video script describes it as a candle where the body closes below the low of the first candle in a bearish scenario, indicating a strong momentum against the current price trend. It is used to anticipate potential fair value gaps and their impact on order blocks.

💡Swing High/Low

In the context of the video, 'Swing High' and 'Swing Low' refer to the highest and lowest points in price during a specific time frame, which are significant for identifying trends and potential reversal points. The script uses these terms to illustrate how order blocks can be formed and how they relate to the overall market trend, such as in the discussion of a bearish lack.

💡Context Area

'Context Area' in the video is related to the importance of understanding where the market is within a larger time frame. It is an area that provides the highest probability for order blocks to hold on lower time frames. The script warns against the mistake of looking at order blocks in isolation without considering the context area, which is crucial for accurate trading decisions.

💡Relatively Theory

The 'Relatively Theory' discussed in the video script refers to the concept of analyzing price action across different time frames to ensure that trading decisions are made with the proper context. The higher time frames are considered more significant and can dictate the direction of the market, which in turn influences the validity of order blocks on lower time frames.

💡Wick

A 'Wick' in the video script is part of a candlestick pattern that extends beyond the main body of the candle, indicating a brief reversal in price during the period but closing back near the main body. The script explains that wicks can represent fair value gaps on a lower time frame and are important in determining the sensitivity of an order block.

💡Draw Liquidity

'Draw Liquidity' in the video refers to a price level or area where there is a significant concentration of orders, potentially leading to a reversal or consolidation in price. The script discusses how understanding draw liquidity can help traders anticipate the market's next move and the potential for order blocks to hold or be broken.

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