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.

Outlines

00:00

📊 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.

05:02

📈 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.

10:04

🔍 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.

Keywords

💡Order Blocks

Order blocks refer to specific areas on a trading chart that are considered to have a high potential for trading opportunities due to the concentration of orders at certain price levels. In the video's context, they are identified by inefficiencies such as gaps between candle shadows, which can indicate significant market decisions. The script discusses how to identify and trade these order blocks effectively.

💡Inefficiency

Inefficiency in trading terms is characterized by abrupt price movements that create gaps between the high and low prices of a security, as seen in candlestick charts. The video script mentions inefficiency as a key criterion for identifying a valid order block, where such gaps suggest a significant change in market sentiment or direction.

💡Break of Structure

A break of structure occurs when the price of a security moves past a previously established pattern or level, indicating a potential change in the market's trend. The script describes this as a second major rule for identifying a valid order block, where such a break can signal the market's intention to continue in the same direction or reverse.

💡Unmitigated

Unmitigated, in the context of order blocks, means that the trading opportunity is a one-time event and should be considered only when the price first touches the order block area. The video emphasizes that order blocks are to be used once, highlighting the importance of timing and recognizing the first interaction with the price level.

💡Win Rate

The win rate is the percentage of successful trades out of the total number of trades made. The video script discusses the importance of win rate in evaluating the effectiveness of trading strategies, particularly when backtesting order block setups, and mentions achieving a 43 percent win rate in their tests.

💡Market Structure

Market structure refers to the pattern or framework of how prices move within the market, which can include trends, ranges, and various levels of support and resistance. The video script uses market structure to explain how certain patterns can influence the effectiveness of order blocks, such as gaps and equal lows or highs.

💡Market Volatility

Market volatility is a measure of the degree of variation in the price of a security over time. The script notes that most winning trades from order block strategies occur during highly volatile sessions, particularly on the first and last days of the trading week, and during specific trading sessions like London and New York.

💡Spread

In trading, the spread is the difference between the bid and ask prices of a security. The video script discusses the importance of considering spread when trading order blocks, as a high spread can cause missed opportunities or false stop-loss triggers, impacting the success of trades.

💡Market Trend

A market trend is the general direction in which prices are moving. The script mentions that order blocks have a higher success rate in trending markets compared to ranging markets, suggesting that aligning trades with the dominant market trend can increase the effectiveness of order block strategies.

💡Confirmation

In trading, confirmation refers to additional signals or patterns that validate a trading setup. The video script discusses the importance of confirmation in lower time frames to avoid unnecessary losses and to trade with more confidence, using price action setups to validate the order blocks.

💡Risk Management

Risk management is the process of identifying, evaluating, and controlling risk involved in trading. The script mentions setting a stop loss and targeting profits based on a specific risk-reward ratio, which is a fundamental aspect of managing risk in the order block trading strategy.

💡Backtesting

Backtesting is the process of evaluating a trading strategy by running it through historical data to see how it would have performed. The video script describes backtesting the order block trading strategy 100 times on the Euro dollar pair, using Trader Edge software, to assess its effectiveness.

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

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thanks for watching and see you in the

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