What is an Order Block in Forex Trading?
Quick Answer: An Order Block is a price zone where large institutional traders (banks, hedge funds) have placed significant buy or sell orders. These zones act as strong support or resistance because "smart money" is positioned there, often causing price to respect these levels on retests.
Understanding Order Blocks in Forex
An Order Block is a specific price zone on a chart where large institutional traders (banks, hedge funds) have placed significant buy or sell orders. These zones often act as strong support or resistance because "smart money" is positioned there.
How to Identify Order Blocks
Order blocks appear as:
- Bullish Order Block: The last down-candle before a strong upward move
- Bearish Order Block: The last up-candle before a strong downward move
The theory is that institutional traders accumulated (bought) or distributed (sold) heavily during this candle, creating an imbalance that causes the subsequent strong move.
Why Order Blocks Work
Order blocks are powerful because:
- Institutional footprint - Large players leave orders in these zones
- Unfilled orders - Banks may have limit orders still resting at these levels
- Self-fulfilling - Many traders watch these zones, adding to their significance
- High probability zones - Price often respects these areas on retests
Trading Order Blocks
Common order block strategies:
Retest Entry
Wait for price to return to the order block zone, then enter in the direction of the institutional move (the impulse that followed the block)
Confluence with FVG
Order blocks combined with Fair Value Gaps create high-probability trading zones
Timeframe Selection
Higher timeframe order blocks (4H, Daily, Weekly) are more significant and reliable
Order Block Characteristics
Strong order blocks typically have:
- Strong impulse move - The reaction away from the block should be decisive
- Clean structure - The block candle should be clear and obvious
- First touch - The first retest of an order block is usually the strongest
- Volume confirmation - High volume during the impulse suggests institutional activity
Order Block vs Support/Resistance
Order blocks differ from traditional support/resistance:
- More specific - Identified as a single candle, not a general area
- Directional bias - Assumes continuation in the impulse direction
- One-time use - Often "consumed" after first successful retest
- Institutional focus - Based on smart money behavior, not retail patterns
Practical Example
GBP/USD is ranging. Suddenly, a strong bullish impulse breaks resistance. The last bearish candle before this impulse (at 1.2650) is your bullish order block. When price retraces back to 1.2650 next week, you enter long with stop below 1.2640, targeting the recent high. The institutional buyers who created the initial impulse are likely defending this zone.
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