It’s a well-known fact that central banks and large financial institutions occasionally intervene in the foreign exchange market to influence the value of currencies. “Order blocks” is a concept directly linked to this behavior of financial entities, which can provide an opportunity for retail traders to capitalize on substantial price swings. It’s like having insider knowledge that can help you make smarter trading decisions.
Having said that, in this article, we are going to thoroughly explore what is an order block in forex, their different types, and how to identify them.
What is an order block in Forex?
Order blocks represent the zones where big market players, like banks/hedge funds, place a cluster of buy or sell trade orders, eventually moving the market in either an up or down direction. To understand what is an order block in forex more simply, just know that it’s an area on the price chart where substantial buying or selling activity has occurred in the past, resulting in a temporary consolidation of the price.
Now let us look at what happens in the background and how are these order block areas formed.
With their humongous trade orders worth millions of dollars, big institutions play smart when it comes to executing them. They don’t just make one big order all at once or randomly place orders at any price.
Instead, they use an approach where they place trade orders at specific price levels, in small portions. This allows them to get the best prices for their trades without causing sudden, massive price swings.
To put it another way, when banks want to make a large trade, they don’t want to mess up the market and end up with a worse price that hurts their profits. Hence, they break up their trade into smaller pieces called order blocks. This way, they get in at the best prices a few times, without causing any major disruptions in the market.
For traders, order blocks hold significant importance as these are the zones where prices could exhibit an “active move.” Traders usually keep an eye on these established levels to assess whether the price will undergo a reversal or break through them.
Moreover, know that not all order blocks are conspicuous and easily noticeable. In fact, it’s common to see a lot of small order blocks forming back to back, gradually pushing the prices either higher or lower.
Take a look at the chart below and you will see multiple, small “buy” order blocks that have slowly propelled the price upwards. Also, every time the price returns to touch one of these order blocks (either through a wick or candle bottom), the big traders seize the opportunity to place even more orders, further reinforcing the price movement.
Types of order blocks
There are typically two types of order blocks:
Bullish order blocks
As the name implies, bullish order blocks function as a support for the price to jump higher.
It is a certain price level where a significant number of buy orders have been executed, creating a strong demand for the underlying currency. Traders who missed the initial buying opportunity often wait for the price to return at this level to place their buy orders, which leads to additional demand and upward momentum.
Bearish order blocks
A bearish order block is the price consolidation zone from which the price strongly breaks in the bearish direction. It represents a price level where a large number of “sell” orders have been executed by institutional traders.
The bearish order block acts as a strong resistance level. Traders often watch this area very closely, waiting for the price to come back to that level so they can sell along the banks and make a profit. This creates even more selling pressure and sends the price even lower, leading to a strong downward trend.
How to identify order blocks in Forex
Now that we have discussed what is an order block in Forex, let’s see how to identify order blocks in Forex.
If you’re on the hunt for NEW order blocks, keep your eyes on the areas where the price seems to be hovering in a super tight range. These types of consolidations are only created when big-shot banks put in a block order – they’re not your typical consolidations where the price bounces around all willy-nilly. Instead, in these consolidations, the closing price stays pretty consistent. So, if you see the price suddenly break free from such consolidation and make a big move in one direction or another, that’s a good sign that the accumulation area was definitely an order block.
Secondly, you can also determine potential order block areas by looking at the previous zones where the price reacted strongly (meaning, previous order blocks). To put it simply, try to identify a significant price movement that has already occurred and mark off its starting point on the chart using an extended rectangle.
Watch out for when the price approaches this extended rectangular zone as it’s highly likely that the price will come back to this point. In case, the price actually touches this order block belt, that’s when you can make your move and execute your trade.
The following chart displays how you can identify such potential order block zones by marking the previous ones. The price can either reverse from this highlighted area or experience a breakout.
Among the many strategies out there, the concept of order blocks is a unique approach that offers a tantalizing glimpse into the inner workings of institutional traders. By comprehending what is an order block in forex and how can they be identified, traders can gain a deeper understanding of price action, identify key levels of support and resistance, and efficiently exit or enter the traders.
With this in mind, delving into the intricacies of order blocks and honing the skill of detecting them on charts can prove to be a lucrative venture if you desire to enhance your trading tactics.