How to Trade Order Blocks

Alex Morris often shares trading results inside of our internal Slack Channel.

DID YOU KNOW?

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2. Kiggundu Musoke mastered Deni’s Fibonacci strategy in 4 months. Win rate 66.33% and total return: 455.1%

3. Phil Butterfield mastered Alex’s Supply & Demand strategy in just 3 months. Win rate 50% and total return: 210.42%

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This time, Simon asked: “Great stuff Alex. What was the split between your strategies?”

Alex replied, “Thanks. The mechanical was good this month, around 50% of it and the rest is S&D/OB's, a fairly even split.”

As you can see, Alex uses multiple strategies to get these kinds of results. He refers to one of them here as OB’s. That’s an abbreviation for Order Blocks.

Here’s why he loves them:

• Order Blocks are areas where institutions, such as banks, accumulate orders.

• Here, you can gauge the market sentiment and what institutional traders are thinking in terms of buying or selling a particular asset.

• We, as retail traders, want to essentially copy what these institutional traders and banks do in the market because they ultimately drive price.

Basically, you get to piggyback off big orders thrown in by the institutions.

Understanding How Order Blocks Work in Forex Trading:

Banks want their orders to get filled at a good price, so it's broken up into several orders rather than one big order. 

One big order will potentially disrupt the market.

For example, Deutsche Bank may want to place an order of 1 billion on EUR/USD, but only 500 million is filled as there is a lack of liquidity. This also explains why the orders are broken up.

Due to the significant size of order blocks, they can absorb all the liquidity that is available, causing an imbalance between supply and demand. Creating massive price swings.

Step-by-Step: How to Trade Order Blocks

Step 1: Developing Your Bias

Your goal is to interpret whether you are in an uptrend or downtrending market on the 4HR time frame before placing an Order Block (OB).

This will develop your bias in the market as to whether a long or short position is required.

Analyze recent price history to interpret whether you are in an uptrend or downtrend market on the 4HR time frame.

For example, is price making higher highs and higher lows? Or is it making lower lows and lower highs?

In the example below, there is a key break and close below the recent low, indicating that price wants to continue the recent momentum to the downside.

Step 2: Order Block Formation

Identify the bullish or bearish OB on the 4HR timeframe.

This will give you, in theory, longer-term trades and will help you prepare for more refined entries on the 1HR OB.

Here’s how:

1. Go to the 4HR chart.

2. Draw your zone from the previous opposing candle before price makes an HH, LL, or if there is a potential break of structure.

For example, if you see prices making an HH, draw a zone from the previous bearish candle before the breakout

Conversely, if you see prices making an LL, draw a zone from the previous bullish candle before the breakout.

The breakout is defined by a sharp movement in price where you see a strong push to either the upside (bullish) or downside (bearish).

This can be a single candle resulting in a potential area of imbalance, or it can be multiple consecutive candles in quick succession.

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Here is a real-life example:

Step 3: Refining Your OB

Identify a 1HR bullish or bearish OB within the 4HR OB

This will give you potential shorter-term trades with more refined areas, with tighter stops, and higher risk/reward trades.

To do this: 

1. Drill down into the 1HR time frame

2. Find where a 1HR bullish or bearish OB is within the 4HR OB

We are applying the same principle discussed in step 2 when identifying your OB. The key part is to ensure that your 1HR OB is within the 4HR OB.

For example, when you see prices making an HH, draw a zone from the previous bearish candle before the breakout.

Conversely, if you see prices making an LL, draw a zone from the previous bullish candle before the breakout.

Step 4: Executing The Trade

Place your limit order when ready.

You need to: 

1. Ensure that all of the previous steps have been applied before placing a limit order.

2. Place your limit order at the top of a bullish OB or at the bottom of a bearish OB.

You can place your limit order as early as when the 4HR bar closes, and you get the HH, LL, or BOS confirmation (this is indicated by the blue line below).

You will be triggered once you have a retracement back to the bullish or bearish OB.

The OB becomes invalid, and you can no longer use it to place future trades once you have executed off it.

Observe how price actually retraces back to your OB. If you get a gradual retracement back, such as trend line liquidity where buyers and sellers are active, that tends to be a more favorable trade rather than volatile, impulsive retracements.

Step 5: Confirm your Stop Loss and Take Profit

Place your stop loss 5 pips above the top of a bearish OB or 5 pips below the bottom of a bullish OB.

Place your take profit at the recent lows (if you have an entry off a bearish OB) or the recent highs (if you have an entry off a bullish OB)

The reason why Alex recommends using recent lows/highs is because it’s considered an area in which institutions have previously targeted liquidity in order to make a profit and where there are respective sell orders.

Final Thoughts: How to Live Off Trading Income

We understand that this was a lot of information. It’s not something you’ll be able to fully understand by reading this.

However, it’s a start.

We all have the same goal. That’s to live off our trading income. The way to do that boils down to the following steps.

1. Learn a profitable strategy the right way.

2. Trade it consistently by making 2-3% per month.

3. Get funded with a large account.

4. Use that money to build your own account.

5. Extract a salary of $5,000-$50,000 per month (depending on what you need).

Bonus Resource: Get the Six Figures From Scratch Book

P.S. You should also consider getting our book, Six Figures From Scratch: It’s about the astonishing science behind everyday men and how they got to 6-figure accounts from nothing. It includes their strategies, 65 chart patterns you can trade, 47 indicators you can use to confirm your trading decisions, and a bunch more.