How to Identify Best Order Blocks to Trade?

Summary

In this video, the speaker explores the concept of order blocks in trading, discussing how some of them succeed while others fail. Through backtesting over 100 order blocks, they identify key characteristics that increase win rates, such as market structure, volatility, trends, and confirmations in lower time frames. The video explains the process for identifying and trading order blocks, highlighting the importance of inefficiencies, breaks in structure, and unmitigated zones. It provides valuable insights into improving trading strategies, including tips on managing risk and targeting profits effectively.

Takeaways

• 😀 Order blocks are powerful areas to execute trades, but not all order blocks are respected by the market. Backtesting over 100 order blocks helped identify which ones work best.
• 😀 A valid order block must create inefficiency, lead to a break of structure or change of character, and remain unmitigated to be considered a quality trading opportunity.
• 😀 The order block strategy includes identifying the block, entering at the start of the zone, placing a stop loss at the end, and targeting double the stop loss range for profits.
• 😀 Backtesting showed a 43% win rate with 100 tested order blocks, which led to a 47% account growth despite the low win rate, highlighting the effectiveness of the strategy.
• 😀 Market structure patterns, like gaps and liquidity grabs, influence the effectiveness of an order block. Understanding these patterns can improve the win rate of trades.
• 😀 Trading order blocks is more successful during volatile market conditions, particularly during the London and New York trading sessions when liquidity is higher.
• 😀 Spread can impact order block trading outcomes, with high spreads often causing missed trades or unnecessary stop-outs.
• 😀 Order blocks have a higher success rate in trending markets compared to ranging markets, and fresh order blocks are generally more effective than older ones.
• 😀 Confirmation in lower time frames is crucial to avoid false signals. Using patterns like change of character and inefficiency gaps can help confirm trade entries.
• 😀 The strategy can be applied across various timeframes, but for best results, use higher time frames (e.g., 4-hour, 1-hour) to spot order blocks and lower time frames (e.g., 15-min, 5-min) for confirmations.

Q & A

What is an order block in trading?

An order block is a zone where price inefficiency occurs, typically due to large institutional trades. These zones can indicate areas where significant market decisions are made, often leading to price movement in the future.

What are the three major rules for identifying a valid order block?

The three major rules for identifying a valid order block are: 1) It must create inefficiency (gaps between candlestick shadows), 2) It must lead to a break of structure or change of character, and 3) It must be unmitigated, meaning it is only used once.

How does the market structure affect the success of order blocks?

Market structure plays a key role in identifying order blocks. Gaps or liquidity grabs below or above certain price levels can significantly influence whether the price will reverse or continue in a certain direction after tapping into an order block.

What is the importance of volatility when trading order blocks?

Market volatility is crucial because order blocks are more likely to be respected during periods of higher volatility, such as mid-week or during specific trading sessions like London and New York. Low volatility may result in missed trades or the price failing to reach the order block.

How do market trends influence the effectiveness of order blocks?

Order blocks tend to be more effective in trending markets than in ranging markets. Trading order blocks that align with the dominant market trend increases the probability of a successful trade, as fresh order blocks generally have higher win rates.

What role does the spread play in trading order blocks?

The spread can significantly impact the effectiveness of trading order blocks. A high spread can cause the price to miss the target or hit the stop loss prematurely, leading to more losing trades.

What is the strategy for placing trades after identifying an order block?

Once a valid order block is identified, you place the trade at the beginning of the order block zone and set a stop loss at the opposite end. The target is typically set at twice the stop loss distance (2:1 risk-to-reward ratio).

How did the backtesting results show the effectiveness of the order block strategy?

In backtesting, the strategy showed a win rate of 43% across 100 trades on the Euro-Dollar pair. Despite the lower win rate, the account size increased by 47% due to a good risk-to-reward ratio and proper money management.

What are the four categories that influence the success of order blocks?

The four categories are: 1) Market structure, 2) Market volatility and spread, 3) Market trends, and 4) Recent order block confirmations on lower timeframes.

What is the significance of using lower timeframes to confirm order blocks?

Using lower timeframes helps confirm the validity of an order block and provides an additional entry reason. This confirmation can prevent unnecessary losses if the market decides to ignore the order block or reverse its direction.