Unveiling the Secret of Order Block Trading Strategy: A Guide to Finding Key Levels of Support and Resistance

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Order Block Trading Strategy

Introduction

Order block trading strategy is a powerful tool used by professional traders to identify key levels of support and resistance on their charts. By using this strategy, traders can potentially increase their profits and limit their losses by taking advantage of price action within order blocks.

In this article, we’ll explore the concept of order block trading strategy, how to identify order blocks, and how to use them in your trading strategy. We’ll also look at some real-life examples and case studies to illustrate the effectiveness of this approach.

What is an Order Block?

An order block is a consolidation area on a chart where price has previously traded before moving in a particular direction. This area represents a significant level of support or resistance, as large institutional players and smart money tend to place their orders within these blocks.

The key to identifying an order block is to look for areas where price has previously consolidated before making a significant move. This consolidation period creates a clear range of support and resistance levels, which can provide valuable insights for traders.

How to Identify Order Blocks

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To identify order blocks on your chart, start by looking for areas where price has previously consolidated before making a significant move. You can use candlestick patterns, such as dojis or hammers, to identify areas where the market is indecisive and range-bound.

Once you have identified an area of consolidation, look for clear levels of support and resistance within that range. These levels will represent the order block, and you can use them to inform your trading strategy.

It’s important to note that not all consolidation areas on your chart will be order blocks. To confirm that an area is an order block, look for significant volume spikes or other technical indicators, such as moving averages or trend lines, that confirm the level’s significance.

Using Order Blocks in Your Trading Strategy

Once you have identified an order block, you can use it to inform your trading strategy. The support and resistance levels within the order block provide potential entry and exit points for your trades.

For example, suppose you identify an order block on the EUR/USD daily chart around the 1.1900 level. You notice that the price has previously consolidated at this level before breaking out to the upside.

To use this information in your trading strategy, you might place a buy order just above the support level at 1.1910, with a stop loss just below it at 1.1890. If the price breaks out of the order block and continues to rise, you can then move your stop loss up to protect your profits.

Alternatively, if the price breaks below the support level and starts to fall, you might exit your position to limit your losses.

You can also use other technical indicators to confirm the significance of the order block. For example, you might look at the 50-day moving average and notice that it is also around 1.1900, providing added confluence that this is a significant level.

Real-Life Examples and Case StudiesĀ 

Let’s look at some real-life examples and case studies to illustrate the effectiveness of order block trading strategy.

Example 1: Order Block on USD/JPY

On the USD/JPY daily chart, we can see an order block around the 107.00 level. This area was previously a strong level of resistance, but once price broke through it, it became a key level of support.

Traders who identified this order block could have placed a buy order just above the support level with a stop loss just below it. If the price continued to rise, they could have moved their stop loss up to protect their profits. Alternatively, if the price broke below the support level, they could have exited their position to limit their losses.

Example 2: Order Block on GBP/USD

order block trading

On the GBP/USD daily chart, we can see an order block around the 1.3700 level. This area was previously a strong level of support, but once price broke through it, it became a key level of resistance.

Traders who identified this order block could have placed a sell order just below the resistance level with a stop loss just above it. If the price continued to fall, they could have moved their stop loss down to protect their profits. Alternatively, if the price broke above the resistance level, they could have exited their position to limit their losses.

Case Study: Order Block on EUR/USD

Let’s look at a case study of an order block on the EUR/USD daily chart.

In early 2021, the EUR/USD currency pair formed an order block around the 1.2150 level. This area was previously a strong level of support, but once price broke through it, it became a key level of resistance.

Traders who identified this order block could have placed a sell order just below the resistance level with a stop loss just above it. If the price continued to fall, they could have moved their stop loss down to protect their profits. Alternatively, if the price broke above the resistance level, they could have exited their position to limit their losses.

In this case, the price did break above the resistance level, but it then formed a bullish pin bar pattern, indicating that the buyers were losing momentum. Traders who identified this pattern could have closed their positions and taken their profits before the price fell back below the resistance level.

Conclusion

Order block trading strategy is a powerful tool used by professional traders to identify key levels of support and resistance on their charts. By using this strategy, traders can potentially increase their profits and limit their losses by taking advantage of price action within order blocks.

To identify an order block, look for areas where price has previously consolidated before making a significant move. Once you have identified an order block, use the support and resistance levels within it to inform your trading strategy. You can also use other technical indicators to confirm the significance of the order block.

By understanding and applying order block trading strategy, you can potentially improve your trading results and take advantage of key levels in the market.

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