How to use order blocks in Forex trading

In Forex trading, large financial institutions and banks, often referred to as 'big players', manage enormous amounts of funds. They can't place all their buy or sell orders at once because doing so would cause the market to move too quickly, making it hard for them to get the prices they want. Instead, they gradually enter their positions, creating areas on the price chart where the market seems to pause or consolidate. These specific areas, where a notable number of buy or sell orders are gathered, are known as order blocks.

In this article, we will explore what order blocks are, their different types, and some noteworthy details about them.

What is an order block?

An order block in Forex trading refers to specific price levels where major market players, like banks and large institutions, have placed buy or sell orders. These order blocks, often abbreviated as 'OBs', are clusters of orders that accumulate at specific price points on a chart. They can be seen across various time frames, ranging from just a few minutes to several weeks. When many orders gather at a particular price level, it creates a noticeable area on the chart where the price tends to consolidate before making a significant move. This behaviour is meaningful for traders because it indicates where strong buying or selling interest exists.

Order blocks can be formed by large institutional traders and many smaller traders, appearing at any time frame. On a chart, these OBs typically look like small boxes or rectangles, marking areas where the price has paused before making a more significant movement. When major players like banks want to enter a position, they usually break it down into smaller parts to avoid causing a sudden shift in the market price.

For example, if a bank intends to buy $100 million worth of EURUSD, it might execute this in several steps: first buying $20 million, then $50 million, and finally $30 million. The price usually reacts significantly once the entire order is completed, creating visible order blocks on the chart.

When prices approach these OBs, traders pay close attention to how the market reacts. The price may bounce back from an order block, indicating a potential reversal in direction, or it may break through the block, suggesting that the current trend will continue. This occurs because order blocks represent areas of strong supply and demand dynamics.

If there are more buyers than sellers, the price tends to rise. Conversely, if there are more sellers than buyers, the price may fall. By analysing how prices behave around these order blocks, traders can make more informed decisions about when to enter or exit trades, helping them navigate the complexities of the Forex market effectively.

Why order blocks are important

Order blocks are exceptional price levels where big players, like banks, place many buy or sell orders. By recognising these areas, traders can find better entry or exit points for their trades. This means they can better predict the market's next move.

To do this well, traders must pay close attention to how prices change and how much trading is happening at those levels. OBs matter because they show where significant buying or selling is occurring. Since large institutions often control most of the trading volume in Forex, they can set critical high or low points for currency prices.

For example, if a bank decides to buy a lot of currency, it can push the price up. When traders spot these order blocks, they get insights into potential future movements in the market based on where these big players are active.

Order blocks can help traders understand market trends. If the price breaks through an OB, it might signal that something is changing—like a shift in how people feel about that currency. This helps traders decide whether to buy, sell, or hold onto their positions.

Types of order blocks

Order blocks have distinct characteristics, and it's essential to differentiate between the various types of OBs.

Bullish order block

In the financial market, a bullish order block is the last bearish candle or a group of bearish candles before the market changes the trend to bullish. Thus, traders can use a bullish order block as a support level for the price to run higher.

A bullish order block happens when a large buy order is placed at the bottom of a bearish trend, causing a bullish impulse in price. When many buyers come in at the same time, the price is pushed up sharply. Because of this vigorous buying activity, that specific price level can become a critical support zone in the future. If the price drops to this level later, it may bounce back again, as traders remember the previous buying interest and are likely to buy again.

In the chart above, we see an example of how a bullish order block is formed.

1. We have a series of downtrend (bearish) candles.
2. A bullish order block—the last bearish candle before a price reversal.
3. This is where traders pay attention—the price retests the order block, which acts as a support level.

This example shows a series of bearish candles acting as a bullish order block.

1. The market is uptrend (bullish).
2. There is a pullback (before the breakout and the continued bullish trend)—we call this a bullish order block.
3. The market returns to test the bullish order block zone, and now it acts as support.
4. The bullish trend continues.

Bearish order block

A bearish order block is the last uptrend candle or series of such candles before the market is impacted by a large sell order at a certain price level, causing the price to drop significantly. This indicates that there is intense selling pressure at that level. In the future, this price zone can act as a resistance level, meaning that if the price tries to rise back to that point, it may struggle to go higher due to the presence of sellers who are likely to sell again.

The chart above shows an example of a bearish order block.

1. A bullish trend.
2. A bearish order block.
3. The price comes to retest the OB, which acts as the resistance before selling.

Breaker order block

A breaker order block is a specific price area on a chart where the price previously reversed due to strong buying or selling. If the price moves up to that spot again after falling, it might bounce back down (indicating sellers are still stronger) or breakthrough (suggesting buyers are taking control). When the price returns to this area, traders watch closely because it can signal whether the previous trend will continue or change direction.

The chart above shows an example of a breaker order block. In the area marked 1, the price returns to retest the breaker order block.

Rejection order block

A rejection order block refers to a price level where the market tried to move higher or lower but was pushed back, indicating strong opposition. For example, if the price attempts to rise to a certain level but quickly falls back down, that level is considered a rejection order block. This shows that many sellers at that point didn't want the price to go higher, making it a crucial level for future trades.

The chart above shows an example of a rejection order block.

Vacuum order block

A vacuum order block occurs when there is little to no trading activity in a specific price range, leading to rapid price movements when it finally breaks through. When the price moves into an area with few orders, it can shoot up or down quickly without much resistance. Traders pay attention to these areas because they can lead to significant price changes. When the price enters a vacuum zone, it often creates opportunities for quick trades as it may rapidly rise or fall without stopping much along the way.

The chart above shows an example of a vacuum order block.

How to identify an order block

To do that, follow the plan below.

• Begin your analysis on higher time frames: daily, weekly, or monthly charts. They can help you spot significant price levels where a Break of Structure (BOS) or a Change of Character (CHoCH) has occurred. These levels are often where large institutions place their orders.

Remember, the price usually consolidates before a strong price movement, meaning it will move sideways for a bit before making a big jump.

• Once you've found those critical levels, look for order blocks that are positioned before strong price value gaps. Specifically, identify the last bearish candle before a robust upward move or the last bullish candle before a downward move. These candles can give you clues about where the market might turn.
• It's essential to check if the order block is valid and consider the overall market context. Trading against the trend (countertrend) can be risky. Ideally, you want to trade in the direction of the identified trend for better chances of success.
• After identifying an order block, wait for the price to return and retest that area. This is when traders expect institutions to show interest in entering the market again. Preferably, focus on untested order blocks. If there's an unfilled price value gap in that order block, wait for it to fill before making your move.
• To confirm your entry, switch to a lower time frame—like going from daily (D1) to four-hour (H4), from H4 to one-hour (H1), and then from H1 to 15 minutes (15min). Look for specific candle formations, such as pin bars, engulfing candles, or Dojis. These formations can provide greater confidence in the direction of the next move. But be cautious: sometimes they can negatively affect your Risk Reward Ratio.

Remember, order blocks can be disrupted by breaking news or market events. It's crucial to check what fundamental events are scheduled on the calendar, especially if you're trading within the day (intraday trading).

How to trade order blocks in Forex

Here's how you can apply the order block Forex strategy step-by-step.

1. Look at the market's overall trend over the past week. Is it going up, down, or sideways? This will help you understand the general direction of the market.
2. Draw Fibonacci retracement levels on your chart. This tool helps you identify areas where the price might retrace (pull back) before continuing in the original direction. Determine Premium and Discount Zones. Premium Zone is where prices are considered high (above 50%). Discount Zone is where prices are considered low (below 50%).
3. Change your chart to the H1 (1-hour) or H4 (4-hour) timeframes. It will help you see more detailed price movements. Look for areas on the chart that are between the Fibonacci 50% and 100% levels. These are potential order blocks. The price should move toward the order block and may come back down to test it again. This is a crucial moment to watch.
4. When the price hits the order block and shows signs of reversing (like a candlestick pattern indicating a change in direction), that's your signal to enter the trade.

Always use a stop loss to protect yourself from unexpected market movements. This means setting a predetermined price where you will exit if the trade goes against you. Remember that while this order block trading strategy can be profitable, no trading strategy is perfect. Always manage your trades carefully.

Final thoughts

• Order blocks are specific price levels on a Forex chart where large market players, such as banks and institutions, accumulate significant buy or sell orders.
• Big players can only place some of their orders at a time due to the risk of causing rapid price movements. Instead, they break their orders into smaller parts to fill them gradually.
• Areas where OBs form often appear as consolidations on charts, indicating where the price tends to pause before making significant moves.
• On charts, the Forex order block typically looks like a small box or rectangle, marking areas of strong buying or selling interest.
• When prices approach OBs, traders observe how the market reacts—whether the price bounces back (indicating a potential reversal) or breaks through (suggesting a trend continuation).
• Recognising order blocks helps traders identify key entry and exit points, predict market movements, and understand trends based on the activities of large institutions.