September 30, 2023
Forex Order Blocks Trading Strategy

Forex Order Blocks Trading Strategy

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Disclaimer: Note, The contents of this website are for personal research purposes only. They are not intended to be investment advice or a recommendation to buy or sell any security. You should consult with a financial professional before making any investment decisions.

Forex order blocks is a strategy used by technical analysts in the forex market to win the game of forex.
Order blocks in forex are not the same as supply and demand zones that you may be familiar with in forex trading.
This post will go into detail about ICT order blocks and breakers, also known as institutional order blocks.
This is an article that examines the topic in such a way that beginners can fully comprehend how order blocks work, how to spot order blocks, and how to trade order blocks.

What are Forex Order Blocks?

How do you find order blocks in forex? An order block is a defined area in the financial market where buyers and sellers enter and move the price of an asset away from the initial price level and into another area of interest.
These order blocks in forex could be a bearish/bullish candle at or near support or resistance prior to a new move up/down.

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Types of Forex Order Blocks

In forex, there are two types of order blocks:

  1. Bullish Order Block: This is a bearish candle movement at/near a Support level prior to a sudden upward move.
  2. Bearish Order Block: This is a bullish candle movement at/near the resistance level prior to a sudden downward move.
    If the bullish order block is not wicky, you should place a buy limit order at the highest price and a stop-loss order at the candle’s lowest price.
    In addition, if the bullish order block is wicky, place a buy limit order at the opening of the candle body with a stop loss at the lowest price.
    The opposite of the preceding setup is used for a bearish order block.
    The order block theory is explained in detail in the preceding summary.

How do You Trade With Order Block in Forex?

How do you trade order blocks? When trading with order block in forex, one should know that indicators can also be used as a confluence to have good entry and exit points.
With support or resistance near order blocks, the price could decide not to trade to an order block and decide to respect the support and or resistance area.

Imbalance Trading with Forex Order blocks

What is imbalance trading?
This is insufficient trading in the market. This can also be referred to as liquidity void.
While trading in the forex market, there exist oftentimes insufficient trading in the market when void orders are filled.

What Causes Imbalance?


Two or more extended range candles create this imbalance.
Imbalance is caused as a result of insufficient trading when opposite traders are less taking advantage of the market order. Imbalance formation is one of the ways on how to identify order blocks in forex trading.
When banks and financial institutions want to raise the price of an asset to a certain level, it is expected that there will be equal or just enough sell orders to pair with their buy orders (this is how they make a profit).
So, when banks move away (say they are buying) from a given level with strength and magnitude, leaving behind an imbalance (liquidity void), we can assume that the sell orders available at that level were completely inadequate to pair with their buy orders.
As a consequence, these banks will frequently return to this level for mitigation.

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Risk Mitigation in Forex Trading

Risk mitigation is a method of lowering risk in the financial market.
When banks or financial institutions move the price of an asset away from a level with both strength and magnitude, retail traders tend to follow suit.
And, because retail traders typically use stop losses to lock in profits while reducing risk, banks will eventually come back to clear retail traders off trades by hitting their stop losses. As a result, banks reduce their risk (the initial trend is resumed, and they enjoy it all on their own). Hence, order blocks in forex are formed as a result of this risk mitigation.

Trading a Bullish Order Block with Bullish Liquidity Void

The following principles must be followed in order to trade a bullish order block with bullish liquidity:

  1. The opposing order blocks in forex should be taken down by the liquidity void.
  2. A liquidity void should emerge in the market structure.
  3. The liquid void should create an equal high equilibrium. This is only true if the price is bouncing off a higher time frame bullish order block (For Reversal Entry) or a trending market (for re-entries).
    The preceding principle applies to trading bearish order blocks with bearish liquidity voids in the opposite manner as previously explained.

Characteristics of Forex Order Blocks


The following characteristics make order blocks tradeable.

  1. Order blocks at or near support and resistance levels
  2. Order blocks at/near critical levels of support and resistance (Good for reversal entries)
  3. Order blocks must destabilize the market structure.
  4. Imbalance after the creation of the order block must be twice the size of the order block.
  5. An opposing order block must be removed from the current order blocks.
  6. A bearish order block must be placed above significant support/resistance (flip zone), whereas a bullish order block must be placed below significant support/resistance.
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Time Frame Analysis for Trading Forex Order Blocks

Higher time frames are used as better triggers to trade order blocks.
The monthly, weekly, and daily time frames are first considered the best direction of an asset price.
Use two or more confirmation setups before trading order blocks.

Conclusion

In trading forex order blocks: Use a higher time frame to decide the trend of the market
Choose a convenient time frame to trade for you
Select your entry based on a confluence
Wait patiently for your confirmed setup before trading to determine both your entry and exit positions.

Disclaimer: Note, The contents of this website are for personal research purposes only. They are not intended to be investment advice or a recommendation to buy or sell any security. You should consult with a financial professional before making any investment decisions.