The world of trading has changed drastically over the past few decades, with individual retail traders becoming more involved in predicting price movements and understanding market dynamics.
While two and three decades ago, central banks and financial institutions could manipulate the markets without any individual trader knowing they were doing so, today, they do precisely the same. However, with advanced trading platforms and tools, retail traders can now use some special tricks to join these big players and use block orders as a trading strategy.
In this article, we will explain what order blocks are in the forex market, how to identify these orders, and how to add the order block trading strategy to your trading arsenal.
What Are Order Blocks Forex?
Order blocks in trading refer to a situation where central banks or large financial institutions accumulate large quantities of a particular asset through one big order.
They are supply or demand zones in which big players can find the comfort of placing large buy and sell orders and completing a big, very big transaction. But, banks and financial institutions cannot place a huge order to buy or sell an asset as they might trigger unexpected moves and create high volatility.
So, as central banks and institutions typically aim to buy or sell valuable assets that are used by ordinary people and have day-to-day uses, they must create these special orders known as “blocks”.
Basically, they split their orders into blocks, enter the markets, make a purchase, and disappear. Then, they do the same repeatedly until they reach their target. For example, if a large bank has to buy 200M EUR/USD, they will make this purchase in three, four, or even more steps.
Additionally, in many cases, they use sophisticated orders not to disclose their involvement in the markets. For example, they use an order that shows 1 on the bid or sell side, although they have a block of 1000. Other traders cannot know that, and this is one method in which central banks and institutions achieve their goal without adding volatility to the markets and drastically changing prices.
Mimic how professionals trade. Discover your inner talent.
Learn everything you need to know about trading the markets from beginner level to the most advanced, helping you to create critical skills and techniques to you can apply in your trading right away.
Order Blocks Forex Trading Example
As we explained above, order blocks are a collection of orders made by large financial institutions, central banks, and governments.
If you are using level 2 market data, you might be able to identify them by seeing above-average order quantities without any significant consideration of the price. This is how central banks and large investment banks typically make their purchases – buying large amounts of the asset at a narrow range of prices.
However, suppose you are using level 1 market data and mostly rely on trading charts as your information market structure. In that case, you are required to identify an accumulation or distribution phase on price charts. The first refers to a bullish order block, and the second to a bearish order block.
Bullish Order Blocks
A bullish order book (BuOB) is a situation where a central bank or a big financial institution accumulates large quantities of a specific currency. For example, let’s say the Japanese central bank (BoJ) aims to weaken the value of the Japanese yen versus the US dollar to stimulate Japanese economic growth. In this situation, the BoJ will enter the foreign exchange market and buy lots of US dollars.
As you can see in the USD/JPY 4H chart above, the market was trading in a tight range for a long time. During this time, we can see several candles with high trading volume at which buyers accumulate the asset (the candles with high trading volume are mostly green).
Then, as soon as the price breaks above the resistance level, it is very likely that the bullish trend will continue.
Bearish Order Blocks
Now, let’s assume a central bank involved in the reverse currency war is entering the market to sell the counter currency and strengthen its currency’s value. For this bearish order block (BeOB) demonstration, we’ll show an example of the US dollar versus the Swiss Franc (USD/CHF).
The distribution area shows that a big player sells large amounts of USD and buys the Swiss Franc. Expectedly, when the price breaks the support level, the price falls in the direction of the big player’s intention.
As central banks and institutions typically aim to buy or sell valuable assets that are used by ordinary people and have day-to-day uses, they must create these special orders known as “blocks”.
3 Things to Consider When Using the Order Blocks Forex Trading Strategy
Order blocks are a unique trading strategy that helps traders find a direction in the market. Usually, it allows traders to find out what financial institutions are planning to do in a particular market and better indicate the next price movement.
Still, there are several tips you need to consider when you use this strategy and apply it to your forex trading strategy.
1. It Does Not Happen Every Day
As you can assume, finding order blocks in the markets is not something you can search for or add to your forex trading plan.
No one knows when central banks or prominent players enter a market, and you certainly do not get any announcements that it’s about to come. Also, order blocks are not a frequently occurring phenomenon but a rarely-occurring situation.
Therefore, you cannot rely on order blocks as your trading strategy; instead, simply integrate them into your trading system and use them whenever you learn to identify order blocks in the market.
2. The Longer the Range, the Bigger the Move
Usually, during the distribution or accumulation phase, markets tend to trade sideways and move in a specific direction once the pile-up is completed. When that happens, there is one rule to keep in mind – the longer the range, the bigger the move.
For that matter, it is crucial to use the Wyckoff chart pattern and market theory. Based on this strategy, a trader enters a position once the price breaks above or below the resistance or support level.
Remember that in many cases, central banks and big institutions want to extend the range period so it would be easier for them to complete their purchase around the same level of prices and without having to deal with high volatility and trending markets.
3. Use Volume Indicators
Another crucial factor to remember when using order block trading strategies is combining volume indicators. The reason for this is that you want to find out if the accumulation period is characterized by high volume and if there is a big player that indeed accumulates the asset in the specific supply or demand zone.
As we mentioned, order blocks seem like a ranging market, but that does not mean every range is an order block. So, to ensure the range is an order block situation, it is best to use a volume indicator to confirm that the trading volume is unusual.
Order Blocks Forex Trading Strategy – Pros and Cons
- Advantageous trading strategy
- Order block trading is an effective strategy, particularly in the foreign exchange market
- Help traders find out what central banks and financial institutions are doing
- Not easy to find order blocks
- Requires the use of other volume indicators
The Bottom Line
In summary, using order blocks is an excellent way to understand the main drivers of market movements. And the forex market is heavily influenced by central banks, who often get into the market to control the value of their currencies.
But even though it is an effective technique to absorb real-time market information, there is no decisive opinion about how one should implement order blocks into a trading system.
Ideally, the best solution would be to keep this trading technique in mind and use it naturally whenever you have identified accumulation or distribution areas that are happening due to central banks and large institutions’ activity in the markets.
Then, most traders enter a position when the price breaks below or above the support and resistance levels, gaining momentum from the considerable purchase made by the central bank or investment bank.
Frequently Asked Questions (FAQs)
Here are the most frequently asked questions about order blocks in trading:
What do order blocks mean?
Simply put, order blocks are an area in trading where governments and big institutions would pile up their forex orders to enter the market or exit existing positions. These players usually cannot buy or sell the entire quantity in one order, so they do it in blocks. Retail traders typically use these order blocks to indicate the next price direction.
How do order blocks work in the forex market?
Even though the forex market is decentralized, it is well known that central banks play a significant role in “manipulating” the levels of their currencies. At the same time, central banks must ensure the stability of their currency’s exchange rate, meaning that they cannot place a big order in the market and spook other market participants.
Consequently, they place orders in blocks or several steps. So, for example, if a bank wants to buy 200 million of the British pound versus the US dollar, they will do it in blocks of 10M, 20M, etc.
How to identify order blocks in the forex market?
Frankly, there are no special tools to identify order blocks in forex trading. This skill will come naturally to you when you practice and trade in the forex market for a long time. You will then be able to identify potential areas where central banks and hedge funds accumulate or distribute large amounts of the asset. Having said that, one of the best tools to identify order blocks in the forex market is to find consolidation ranges or unique chart patterns where the price finds market equilibrium and use volume indicators to identify the high trading volume. Additionally, you can use the order flow analysis method to see market orders waiting to be executed.
Do you want access to incredible daily live streams by expert market analysts?
Next LIVE stream starts in: