Order Blocks: Institutional Trading Zones

What are Order Blocks?

Order blocks are defined as the last candle that forms before a movement that breaks market structure (MSB or BOS). These significant areas on a price chart represent where institutional orders have been placed and executed, creating imbalances in buying and selling pressure. These zones often precede strong directional moves as large market participants position themselves before pushing the price in their desired direction.

Unlike traditional support and resistance levels, order blocks represent actual market activity from sophisticated players - not just psychological levels. They highlight areas where major buying or selling has occurred, often on high volume and with notable momentum.

The concept of order blocks is closely tied to supply and demand principles but with a specific focus on institutional footprints in the market. By identifying these zones, retail traders can align themselves with the likely intentions of larger players.

Types of Order Blocks

Bullish Order Block

A bullish order block is specifically defined as the last bearish candle that forms before a bullish Break of Structure (BOS) or Market Structure Break (MSB). It serves as the final selling pressure before a significant bullish move. It represents a zone where institutional buyers have accumulated positions before pushing the price higher. Specifically:

• It appears as a bearish candle at the end of a downtrend
• This candle is followed by a strong move up that breaks market structure
• The entire range of this candle becomes the bullish order block
• When price later retraces to this zone, it often finds support and continues the uptrend

Bullish order blocks represent areas where smart money has accumulated long positions, creating a zone that often holds as support when retested.

Bearish Order Block

A bearish order block is specifically defined as the last bullish candle that forms before a bearish Break of Structure (BOS) or Market Structure Break (MSB). It serves as the final buying pressure before a significant bearish move. It represents a zone where institutional sellers have distributed positions before pushing the price lower:

• It appears as a bullish candle at the end of an uptrend
• This candle is followed by a strong move down that breaks market structure
• The entire range of this candle becomes the bearish order block
• When price later retraces to this zone, it often acts as resistance and continues the downtrend

Bearish order blocks highlight areas where smart money has distributed their positions, creating a zone that frequently acts as resistance when retested.

Why Order Blocks Are Important

Order blocks have become a cornerstone of modern price action trading for several key reasons:

• Institutional Activity - They reveal where large market participants have been active, allowing retail traders to align with smart money
• High-Probability Zones - When properly identified, order blocks create high-probability entry and exit points
• Strong Reversals - Price often respects these zones with powerful reversals or continuations
• Market Structure Context - They help traders understand the bigger picture of market movements and trends
• Multiple Timeframe Alignment - Order blocks can be identified across timeframes, creating particularly strong zones when aligned

How to Identify Order Blocks

The last candle before a Break of Structure (BOS/MSB) forms the order block

As shown in the image above, order blocks are precisely identified by their relationship to market structure breaks:

• Proper Sequence is Critical: Market structure must be formed, followed by the order block candle, and then a decisive break of that structure (BOS/MSB)
• Only the Last Candle: Only the final candle before the structure break qualifies as an order block - not the entire consolidation zone
• Clear Structural Violation: The structure break must be definitive, breaking a key swing point that changes the market's directional bias

For Bullish Order Blocks:

1. Identify a downtrend with a series of lower highs and lower lows
2. Look for a bearish candle followed by a strong move up that creates a Break of Structure (BoS) or Market Structure Break (MSB) by breaking the previous swing high
3. The bearish candle that precedes this BoS/MSB becomes the bullish order block
4. The strongest order blocks often form with high volume and substantial candle size

For Bearish Order Blocks:

1. Identify an uptrend with a series of higher highs and higher lows
2. Look for a bullish candle followed by a strong move down that creates a Break of Structure (BoS) or Market Structure Break (MSB) by breaking the previous swing low
3. The bullish candle that precedes this BoS/MSB becomes the bearish order block
4. Pay attention to volume and candle size for confirmation of institutional activity

Understanding Market Structure Breaks (MSB):

A Market Structure Break (MSB) or Break of Structure (BoS) is the essential element that defines and validates an order block:

• Bullish MSB/BoS: Occurs when price breaks above a previous swing high in a downtrend, signaling a potential trend reversal or new uptrend
• Bearish MSB/BoS: Occurs when price breaks below a previous swing low in an uptrend, signaling a potential trend reversal or new downtrend
• The candle immediately preceding this structure break is by definition the order block
• Without a clear MSB/BoS, there is no valid order block - this structure break is what differentiates order blocks from regular support/resistance areas
• Order blocks are essentially a pre-break consolidation - the last moment of price accumulation or distribution before a decisive move

Key Characteristics of Valid Order Blocks:

• The move after the order block must create a clear Break of Structure (BoS/MSB)
• The move should be strong and directional (ideally at least 3:1 compared to the order block candle size)
• Higher volume often supports the validity of the order block
• The order block should not be overly extended from the breaker candle that created it

Important Considerations When Trading Order Blocks

While order blocks can be powerful trading tools, keep these important factors in mind:

• Not All Order Blocks Are Equal - Look for those with strong momentum breaks, higher volume, and clear market structure changes
• Timeframe Matters - Order blocks on higher timeframes tend to be more reliable than those on lower timeframes
• Market Context - Always consider the broader market context and trend when trading order blocks
• Partial Fills - Sometimes price will only test part of an order block before reversing - be prepared for this possibility
• Confluence Is Key - Order blocks are most powerful when they align with other technical factors (support/resistance levels, Fibonacci retracements, etc.)
• Patience - Valid order blocks may take time to be retested - forcing trades at suboptimal locations reduces their effectiveness

Order Blocks vs. Supply and Demand Zones

While similar in concept, order blocks and supply/demand zones have some key differences:

• Order blocks specifically focus on the last candle before a strong breakout move
• Supply and demand zones can encompass multiple candles showing accumulation or distribution
• Order blocks are more precise, usually limited to a single candle's range
• Both concepts highlight areas of institutional activity, but through slightly different lenses

Conclusion

Order blocks provide a powerful framework for understanding institutional activity in the markets. By identifying these zones where smart money has established positions, retail traders can find high-probability areas to align with the likely future direction of price.

While no trading concept works 100% of the time, order blocks offer valuable insights into market structure and potential reversal or continuation zones. By combining order block analysis with solid risk management and an understanding of broader market conditions, traders can enhance their strategic approach to the markets.

Remember that proficiency with order blocks requires practice and screen time. Start by identifying these zones on historical charts to develop pattern recognition skills before implementing them in live trading scenarios.