Over the recent years, there’s been a revolution in retail trading strategies, with ICT trading concepts (or smart money concepts) gaining massive popularity. One of the cores of these concepts is the Order Block (OB). In this article, we’ll go through order block trading by showing what an OB is and how you can identify and use OBs with practical examples, including a simple order block trading strategy that you can build on.
- Order blocks (OBs) are critical zones where institutional limit orders cluster, often leading to strong price reactions, making them valuable for trading entries and exits.
- Identifying valid OBs requires understanding market structure shifts (MSS/BoS) and liquidity sweeps, ensuring you trade only the highest-probability setups.
- A simple OB trading strategy involves confirming trend direction, spotting a valid OB after a liquidity hunt, setting tight entries and stops, and targeting major liquidity pools.
- The psychology behind OBs lies in institutional traders’ need to complete orders and defend their positions, causing aggressive price movements away from these areas.
What Is an Order Block in Trading?
There are many different definitions of an OB, but I will introduce it in the simplest way possible. An order block is where a considerable number of limit orders are located, which are mostly set by institutional traders and large investors. As a result, we expect the price to rebound quickly from them, as they’re basically supply and demand zones. So, the whole idea of order block trading is to enter a trader on a valid OB to ride and catch a large move created by big money traders.
Identifying Order Blocks
The key to identifying OBs is understanding market structure. The first step to find an order block to trade is to determine the market trend, the potential target, and the area that is most likely for the price to pull back to before continuing in the initial direction and toward the target. Let’s have a deeper dive and see how you can find bullish and bearish OBs.
How to Find a Bullish Order Block?
Imagine that the market is trending higher, moving toward a specific liquidity pool located above the current market price. In this situation, we’ll consider the last primary bullish price leg, and the last bearish candle (or few candles) before the uptrend began will be our bullish order block. Remember, a market structure shift (MSS) or a break of structure (BoS) should first occur before we can identify an OB.
How to Find a Bearish Order Block?
Finding a bearish OB involves a similar process, but everything is reversed. When the market is moving lower toward a target, which is likely a key liquidity pool, the last bullish candle before the most recent, major bearish leg will be the bearish order block we’re looking for.
How Order Block Trading Works (Trade Example)
Now that we’ve covered what an OB is and how to identify it, let’s see how order block trading is done. While there are many different strategies based on ICT order blocks, I’ll explain my personal strategy.
The first step in my OB trading strategy is, as previously mentioned, identifying market structure and trend. As the chart below suggests, the market has been in an uptrend before experiencing a long consolidation. So, as the market structure is bullish and there’s a clear buy-side liquidity pool above the recent high, our bias will be bullish, and we will look for bullish OBs.
The price then demonstrates an impulsive bullish move, breaking multiple highs but leaving the main liquidity pool we’re watching intact before experiencing a pullback. This is when we look left and identify the last bearish candle before this rally, which will be our bullish order block. Moreover, as evident on the chart, the price has also cleared sell-side liquidity to its left (below recent lows), before beginning the rally. Therefore, our OB is formed after a liquidity hunt, which makes it highly probable.
We can then set our entry order at the high of the bullish OB candle, and our stop loss below the low. The target will be the buy-side liquidity resting above the recent major high, which the price rushes to clear out after a quick rebound from the bullish OB. This is a simple yet effective OB trading strategy you can use for trend following in almost any asset class.
You can also use order blocks for additional confirmation for strategies like the ICT Silver Bullet, which gives you a clear framework.
Valid vs Invalid Order Blocks
There are some key differences between valid and invalid OBs. Here are a few I’ve understood over the years:
- Valid order blocks almost always form after liquidity hunts. So, if there’s no recent liquidity sweep, the OB you’re considering is likely invalid.
- There should always be a Market Structure Shift (MSS), or a Break of Structure (BoS), for an order block to be valid. If the move you’re watching didn’t lead to any of these, there won’t be a valid OB inside it.
- This one is not a 100% rule, but generally speaking, order blocks that have been previously tested or even worse, broken through, will no longer be valid.
The Psychology Behind Order Blocks
Up to this point, we’ve explained everything you need to identify order blocks on the charts, and you’ve also seen how the price reacts to the valid ones. However, what’s the reason behind this reaction?
Well, OBs are certain price ranges that institutions and large investors have initially entered the market. Sometimes, they’re unable to fill all their orders, and the price moves away without triggering them all. Therefore, they try to push the price back to that certain range, which is the OB, to be able to get more entries around the same price mark. When these limit orders are filled, they will once again push the price higher using aggressive, market orders.
Another reason behind the price’s reaction to order blocks is that, because this is the entry point for big money traders, they will protect it by triggering more market orders and try to move the price away from this area, to avoid liquidation of their initial positions.
The Difference Between OB and FVG
Both order blocks and fair value gaps are ICT or smart money trading concepts. While they can both be used for trade entries and exits, there are fundamental differences between them. The most important distinction is that an OB is an area with tons of limit orders and buying or selling interest, while a Fair Value Gap is a price imbalance that is mostly caused by a thin order book and quick price moves.
Yet, note that the price is also drawn to Fair Value Gaps, and when valid, they can reject the price and push it in the initial direction. For more information, check out our complete guide on the ICT Fair Value Gaps.
Conclusion
Order blocks are one of the most popular trading concepts among smart money and ICT traders. You can use OBs as great entry points, if you do it the right way, and catch quick, and relatively large moves. Order blocks can also be used as exit points, as we expect the market to react to them. Therefore, it’s a must-learn concept for price action, SMC, and ICT traders.
FAQ
What Is the Best Timeframe for Order Block Trading?
As always, there’s no single prescription to be given about the best timeframe to trade a specific strategy. However, ICT concepts work the best when applied to intraday trading. Timeframes below 1-hour are best for trading order blocks.
Still, remember to limit your trading to ICT Killzones for the best results. This is something I personally recommend in order to optimize your performance.
Is Order Block Trading Profitable?
Yes, order block trading is profitable, but if you do it the right way. This means creating and backtesting your strategy before jumping into real trading, and also using clear risk management rules. Make sure to also test your OB trading strategy on demo accounts after the backtesting and optimization step to master it in live markets.
Is ICT the Creator of the Order Block Concept?
While the Inner Circle Trader claims to be the creator of the order block concept, some claim it to be the same as supply and demand trading with new names.
