Order Blocks (OBs) are a crucial concept in Inner Circle Trader (ICT) trading strategies, representing areas where institutional traders (also known as Smart Money) execute large orders.
These orders influence the market’s direction and create areas of interest where price is likely to react in the future.
Understanding how order blocks work can give retail traders insight into market structure, helping them align with institutional order flow and avoid common traps.
In this detailed explanation, we’ll break down what order blocks are, why they are critical in ICT trading, and how you can identify them with practical examples.
1. What Are Order Blocks in ICT?
In ICT trading, an order block refers to the last candle (or group of candles) where institutions placed large buy or sell orders before a significant price movement.
These areas represent supply or demand zones where institutions will often return to execute more orders.
Price tends to revisit these zones because institutional orders are often too large to be filled at once, leading to partial fills.
When the price returns to an order block, it often signals a continuation of the trend.
Order blocks can be:
1. Bullish Order Blocks:
These are areas where institutional traders bought large positions, typically found at the base of a significant upward move.
2. Bearish Order Blocks:
These are areas where institutional traders sold large positions, typically found at the top of a significant downward move.
2. Why Are Order Blocks Critical in ICT?
Order blocks are critical in ICT because they offer a window into where Smart Money is active in the market.
Retail traders often get caught on the wrong side of the market because they do not understand the areas where institutions are executing large orders.
By identifying order blocks, traders can:
1. Trade with the Institutions:
Recognizing where institutional traders are active allows you to align with the market’s true direction.
2. Identify High-Probability Entry Points:
Since price often returns to order blocks before continuing in the same direction, these areas offer great opportunities to enter trades with low risk and high reward.
3. Improve Stop-Loss Placement:
Understanding order blocks helps traders place stop-loss orders outside the zones where institutional traders are likely to re-engage the market, avoiding common retail traps.
3. How to Identify Order Blocks in ICT?
To identify an order block, follow these key steps:
1. Look for the Last Opposite Candle Before a Major Move:
An order block is often the last bearish candle before a significant bullish move (bullish order block) or the last bullish candle before a significant bearish move (bearish order block).
2. Significant Market Reaction:
The market must react strongly from the order block, indicating that large orders were executed there.
3. Market Revisit:
Price often returns to these areas before continuing in the original direction. When price revisits the order block, it provides a potential entry point for a trade.
4. Price Confirmation:
Look for a price confirmation like a rejection pattern (e.g., a pin bar, engulfing pattern) when the price revisits the order block to enter the trade.
4. Example of a Bullish Order Block in Action
Let’s say the EUR/USD pair is trading in a downtrend, but then it makes a sharp reversal and begins to rally upward.
Before the rally, the market forms a bullish order block — the last bearish candle before the significant upward move.
1. Identification:
The last bearish candle before the sharp rally is identified as the bullish order block.
This candle signifies where institutions likely placed large buy orders before the move up.
2. Price Return:
After the rally, the market retraces and revisits the order block.
At this point, retail traders might get nervous and assume the trend has reversed again.
However, for ICT traders, this is an opportunity.
3. Entry Point:
As the price returns to the bullish order block, it rejects the zone and moves higher, confirming that institutions are still buying in that area.
A trader can place a buy order in this zone, with a stop-loss below the order block and target the next liquidity pool or swing high.
5. Example of a Bearish Order Block in Action
Consider GBP/JPY, which is in an uptrend. Before a sharp downward move, the last bullish candle forms a bearish order block.
1. Identification:
The last bullish candle before the significant downward move is marked as a bearish order block, indicating where institutional sellers likely placed large orders.
2. Price Return:
After the downtrend, the price retraces to revisit the bearish order block.
Retail traders might see this as an opportunity to buy, but ICT traders will wait for confirmation of a reversal.
3. Entry Point:
When the price tests the bearish order block and rejects it with a clear price pattern (such as an engulfing candle or pin bar), this confirms that institutional traders are re-entering their sell positions
A trader can now place a sell order in this zone, with a stop-loss above the order block and target the next liquidity pool or swing low.
6. Why Do Order Blocks Work?
Order blocks work because they represent areas where Smart Money needs liquidity to execute large orders.
These large players cannot enter or exit the market in one go without causing significant slippage or moving the market against themselves.
Instead, they use order blocks to enter in phases. This is why price tends to return to these levels—because institutional traders have more orders to fill.
Retail traders often get caught placing trades at these levels without understanding that institutions are entering the market with much larger orders, leading to quick reversals.
By recognizing order blocks, ICT traders can avoid these traps and align their trades with the true market drivers.
7. How to Trade Using Order Blocks in ICT
1. Wait for Price to Return to the Order Block:
After identifying an order block, don’t enter the trade immediately. Wait for the price to return to the zone, as this often provides the best entry point.
2. Look for Confirmation:
Once price returns to the order block, look for confirmation patterns such as engulfing candles or pin bars to ensure that institutions are re-entering the market.
This helps confirm that the market will likely move in the original direction.
3. Set a Stop-Loss Beyond the Order Block:
Place your stop-loss just outside the order block. If price moves beyond the order block, it’s a sign that the setup may be invalid.
4. Target the Next Liquidity Pool:
In ICT trading, the next target after entering from an order block is often the next liquidity pool, such as a previous high or low.
These areas attract institutional activity, providing a logical place to take profit.
8. Real-World Example: Order Blocks in Stock Trading
Let’s say a stock like Apple (AAPL) is in a downtrend, but then it suddenly rallies, breaking out of the previous bearish trend.
Before the rally, the last red (bearish) candle becomes a bullish order block.
When Apple retraces back to this level after the rally, this is a key area to watch for price action.
1. Price Reaction:
When the price touches the order block, it bounces, confirming that institutions are buying again.
2. Trade Entry:
Traders can enter a long position at this level, placing a stop-loss just below the order block and targeting the next liquidity area (e.g., a previous high).
By using this order block as a signal, traders are essentially trading alongside Smart Money, improving the odds of a successful trade.
9. Conclusion
Order blocks are a critical concept in ICT trading, representing areas where institutional traders place large buy or sell orders.
By understanding how to identify and trade these order blocks, retail traders can avoid common pitfalls and align themselves with institutional order flow.
Key points to remember:
- Order blocks are created by the last bullish or bearish candle before a significant move.
- They serve as key areas of interest where institutions are likely to re-enter the market.
- Price tends to revisit order blocks, offering high-probability entry points.
- Identifying and trading order blocks allows traders to trade in line with institutional moves rather than against them.
Mastering order blocks in ICT can help traders sharpen their entries, improve their risk management, and increase their overall profitability in the markets.
Okay, here are 4 FAQs about order blocks in ICT trading, with answers less than 100 words:
Frequently Asked Questions
Q1: What is the significance of order blocks in ICT trading?
Order blocks are critical because they reveal where institutional traders are active.
They offer insight into the market’s true direction, enabling traders to align their strategies with the Smart Money.
These areas provide high-probability entry points with reduced risk.
Q2: How does a trader identify a bullish order block?
A bullish order block is typically the last bearish candle before a significant upward price move.
It signifies where institutions placed large buy orders.
The market must show a strong upward reaction from this point.
Q3: What does a bearish order block indicate and how can it be identified?
A bearish order block is the last bullish candle before a significant downward price move.
It signals where institutional traders placed large sell orders.
A strong downward reaction from this area confirms it as an order block.
Q4: What is the best strategy for trading using order blocks?
After identifying an order block, wait for the price to return to that zone.
Look for a confirmation pattern like a pin bar or engulfing candle. Set a stop-loss just outside the order block and target the next liquidity pool.
Leave a Reply