How To Find And Use ICT Order Blocks In Your Trading - PriceActionNinja (2024)

In the last few years, the concept of order blocks has exploded, with many traders wondering what they are and how to use them when trading.

So, what the heck they then?

In short: order blocks are a powerful type of supply and demand zone.

Order blocks pack a serious punch when it comes to triggering reversals – way more than your average zones. Plus, they’re unique little beasts, forming exclusively from tight range consolidations instead of a two or three candle base.

Yep, that makes ’em pretty rare compared to your standard S&D zones.

Order blocks are a foreign concept to most traders.

So today, let’s fix that…

In this post, I’ll give you a complete rundown of order blocks. You’ll learn why order blocks form, how to identify and draw them, and a few ways to trade the blocks.

Sound good?

Let’s dive in…

Order Blocks Uncovered: Understanding How And Why They Form In Forex

Order blocks describe a rare type of supply and demand zone created when banks use a block order to enter a significant trading position.

For order flow traders, block orders probably sound familiar.

Imagine the banks need to enter a huge buy or sell position, but they don’t want to send the market into a frenzy.

So, they whip out their secret weapon: block orders!

These sneaky, special orders let banks slip into colossal positions without upsetting price, ensuring they score the best prices and max out those profits.

Talk about playing it smooth!

Block orders split the banks positions into smaller, more manageable chunks, and then places them at similar prices. The result?

The banks massive position gets entered silently without triggering a huge price spike.

Pretty neat, huh?

Order Block Theory: Why The Banks Use Block Orders

Picture this: JP Morgan’s itching to buy a cool 200 million in EUR/USD, but they hit a snag – there’s only 50 million being sold right now.

Yikes!

Now, JP Morgan can’t just dive in and place that order; there aren’t enough sellers available. If they take the plunge and buy now, they’ll only buy 50 million. The remaining 150 million would get filled at sky-high prices, slashing profits and giving JP Morgan one heck of a headache.

The solution?

A block order, of course!

A block order will break the banks 200 million position into smaller chunks, allowing them to enter in a more manageable and discreet way without upsetting price too much.

For example: The banks initial 20 million order gets paired with 50 million on the sell side. No sudden price hike here – the sell orders still overshadow the buy orders, 50 million versus 20 million.

Then, once the orders rev up, the block order enters the next chunk.

That process – of placing one 20 million order, then another, and another, etc – causes a tight range consolidation to form, creating an order block zone.

Here’s what your typical bearish order-block looks like –seen one of these before?

Notice the zone forms sits around a tight range consolidation – a consolidation contained within a small price range?

Order-blocks create these consolidations.

The banks use block orders to enter a large position without upsetting price. How’d they do that? By placing smaller positions around similar prices. That achieves the effect of placing a single large position albeit using smaller positions instead.

The banks placing positions around similar prices causes a tight range consolidation to form; each position creates a high (or low if they’re shorting) of the consolidation.

Before we move on, here’s a quick summary of order blocks:

Think of order blocks as supply and demand zones cousin.

They’ve got a similar vibe, but with a twist: they only pop up when price zooms away from a tight range consolidation.

A block order allows the banks to enter a large position, but it does so by scattering smaller positions at similar prices, which lets the banks emulate placing one massive position albeit using smaller orders, keeping price contained.

That makes it easier for the banks to buy/sell without upsetting the price.

How Order Blocks Are Different To Normal Supply And Demand Zones

So, order blocks are supply and demand zones – just a different type.

The question now is… how do they differ from the normal zones?

Really, there are two key differences…

Difference #1: Regardless of where or when they form, order blocks always outperform standard supply and demand zones.

The reason why: Because order blocks form via the banks buying or selling using a block order. which they only use when they have a large position to place. If they’re placing a big position, the banks don’t want price to break beyond the point they bought or sold – the S or D zone.

Therefore, the zone has a high probability of causing a reversal because the banks wouldn’t place a big position unless they were very confident price was heading in the direction they want.

Difference #2: How order block zones form.

In general, order blocks form the same way as normal supply and demand zones: from a sudden, steep rise or decline away from a base.

So, what’s the difference then?

The base ALWAYS forms a tight range consolidation, like you see below.

Order blocks always form when price jets away from a tight range consolidation. That’s the structure created when the banks use a block order to enter their positions.

The block order enters each position at a similar price, causing the highs of the consolidation to form at almost equal prices.

The result?

A tight range consolidation.

To identify order blocks: Look for a tight range consolidation with almost equal highs and lows. They only form from the banks using block orders, meaning a zone MUST exist at the source.

Elevate Your Trading Strategy: How To Find And Use Order Blocks

Order-blocks perform best as a high probability side setup alongside your main trading strategy. The zones don’t appear often enough for a single strategy.

As a side setup, however, the zones can provide high probability trade signals to generate additional profit alongside your core strategy.

That’s how I use them, and I recommend you the same.

Supply and demand remains my core strategy, but I have two or three setups I look for alongside…

1. Order blocks.
2. Pin bars.
3. The reversal pattern in my book.

Using these patterns together allows me to make more money and lower my risk – due to the diversification they provide to my main trading strategy.

So, how do you find and use order blocks in your trading?

Since order blocks are supply and demand zones – just a much rarer type – you trade the zones using the same process:

1. Identify a tight range consolidation.
2. Mark a zone around the consolidation.
3. Wait for price to return and enter the zone.
4. Enter upon seeing a pin bar or engulfing pattern.
5. Take profits as price reverses and moves in your favor.

Easy, eh?

Here’s a quick example…

First: Find and mark a zone on the chart…

In this case I’ll use a bearish order block.

Pro Tip: Drawing order block zones . However, one point to remember: always include the entire consolidation in the zone. The block order enters positions all over the zone, so you must include the whole area for a correct zone.

Next: Wait for price to enter the zone and provide a confirmation signal.

For bullish order blocks:

• Bullish pin bar/hammer
• Bullish engulfing pattern
• Large bullish candle

For bearish order blocks:

• Bearish pin bar/hammer
• Bearish engulfing pattern
• Large bearish candle

Now: Place a stop on opposite edge of the zone and see if price reverses. Take profits by moving your stop as price moves in your expected direction.

Simple.

Finding the order blocks can prove tricky, but gets easier with practice.

The key point to remember: Look for consolidations created by a tight range, where the candles form a rectangle like structure.

That indicates the banks created the consolidation using a block order.

Therefore: An Order block must exist at the source and create a zone.

Let’s go through some examples…

Here’s your typical bullish order-block zone.

The zone forms after a move away from a tight range consolidation. Price moves back and forth between 1.21600 and 1.22000 before breaking higher, forming the order block zone.

Pay attention to the consolidation… notice how tight the range is?

Unlike normal consolidations where large price fluctuations creates large, uneven swings, the swings above appear small and terminate a similar prices. The leads to a tight price range, which price sits within until the breakout.

Here’s another one, from the 15 minute chart.

Check the consolidation: it’s compact, tightly packed, and almost rectangular in appearance.

A clear sign a order block zone must exist at the source.

Sometimes, the consolidation will form after a move rather than at a swing low or high.

When it’s time to draw the order block zones, start with the freshest major swing low/high and stretch it to the consolidation – now you’ve got a zone that’s ready to rock!

The Ultimate Order Block FAQ: Get Informed and Trade Smarter

Before I wrap up, here are some quick answers to the most common questions traders have about order blocks.

Q: What Is Meant By Order Block Imbalance?

A: Order block imbalancerefers to the rapid spike or fall in price caused by banks entering via block orders.

The order imbalance causes the rise/fall and produces the order block zone. The same happens with regular S&D zones, just through the use of standard orders instead of block orders. The imbalance between orders creates the zone.

Q: Is There An MT4/5 Indicator That Can Find Order Blocks For Me?

A: Yes, but they’re a waste of time.

Orderblock indicators usually mark incorrect order block zones. These indicators will often locate regular supply and demand zones rather than order blocks. These zones can still offer decent trade entries, but they’re not order blocks.

Q: What Is Order Block Theory?

A: Order block theory states institutional traders use block orders to enter trades. It’s a theory because no one knows (for sure) how the banks enter.

Numerous studies and papers, however, confirm the banks often use block orders to enter large positions. However, the lack of a centralized forex order book means no-one can actually see the block orders entering the market.

Q: Who Invented Order Blocks?

A: Technicallyspeaking,noone.

Block orders have been around for decades, but up to now no-one could decipher the price action behind them – which, I suppose, is the whole point. But with the release of academic order flow papers over the years, order blocks have become more prominent, with many traders now aware of their existence.

Q: What’s The Best Timeframe For Trading Order Blocks?

The Bottom Line

Well,Ihopethisposthashelpedyouunderstandorderblocksalittlebetter.

Orderblocks,asImentioned,makeagreatsetuptowatchforinadditiontoyourmainstrategy;thatishowIusethem.Additionally,youcantradethemataslightlylargersizebecausetheyhaveamuchhigherlikelihoodofcausingareversalthantypicalsupplyanddemandzones.

Neat,huh?