Understanding Order Blocks in Trading

Identify the starting point of an impulse as a demand zone. This is because in that area, traders previously entered long positions with a purpose. If the price returns to the demand zone, there's a higher

probability they will buy again. The start of a downward move is marked as a supply zone where traders have previously taken short positions. When price revisits this zone, it's more likely that selling will occur again.

Imbalance between buyers and sellers can be seen through fair value gaps. These gaps happen when price moves quickly, leaving orders unfilled, and the market may come back to these areas later to regain the balance.

We mark the candle before the gap as our order block zone because we believe decisions are made during that candle. We expect that if the price returns to this order block, it could react strongly as buyers or sellers step back in. So basically, order blocks are supply and demand zones, but the difference

is that we focus on areas where larger institutional orders are placed. Now, how do we mark the order blocks? We take the entire candle before the fair value gap and mark it as the order block. The color of the candle doesn't matter.

For example, in a bullish gap, it makes no difference whether the candle is green, red, or even a doji without a strong body. All of them can be considered valid demand order blocks. Here's an important point. Sometimes a wick grabs liquidity before

the imbalance happens. In that case, we also include the wick as part of the order block zone. This marks the real beginning of the imbalance, and our

stop loss should always be placed below this wick for protection. Order blocks can be small or very large. When the zone is small, we should use a wider stop loss below it because even though order blocks are strong supply and demand areas, the price doesn't always

reverse exactly from this box. We need to give it some room to breathe. On the other hand, when the order block is large, you can place your entry around the middle of the zone for a better price or switch to lower time frames to look for confirmation and rejection signals. Each time the price breaks structure to the upside, it signals continuation of the

trend. The bullish order blocks formed along the way have a higher chance of rejecting the price to the upside if the price pulls back to them. This uptrend continues until the market breaks below a protected low. That's called a change of character, and it signals a possible reversal.

It shows sellers have gained control and pushed price lower. The bearish order block that caused this move becomes a great opportunity to go short. From there, if the trend starts making lower lows

and lower highs, the bearish order blocks that form along the way also become strong trading setups. To see the market direction, we look for break of structure, changes of character,

and reversal patterns on the chart. If you cannot clearly see the market direction on a time frame, it is better to skip that pair. Trading when the direction is unclear increases the risk, so it is safer to focus on pairs with a clear trend for better decisions and risk

management. Next, we identify fair value gaps and mark the order blocks, which are our main trading zones. Now we can simply place a sell limit at the order block and put our stop loss above

it. Here is a quick recap for the bullish scenario. The same rules apply but in reverse. We wait for the price to reach our higher time frame order block. Then we look for a change of character in the lower time frame, which happens when

the price breaks below a swing low. This confirms that the short-term downtrend is over, and buyers are taking control. Once confirmed, we look for bullish order blocks on the lower time frame and place

our buy limit at the start of the zone with the stop loss below it. Targets are managed in the same way as in the bearish setup. Now, before we look at real chart examples, let's review some common scenarios and how to handle them.

Scenario one: a very small order block on the lower time frame. In this case, use a slightly larger stop loss zone to protect your trade from normal market fluctuations. A stop that is too tight can get taken out too

easily. Scenario two: a very large order block on the lower time frame. If we set our stop loss below the entire zone, it could be too wide and reduce our risk to reward ratio. Instead, we can either use a smaller

zone just below the order block as our stop or place our entry closer to the middle of the zone. Both options help improve risk to reward. Scenario three: multiple order block formations.

We can trade all of the order blocks as long as they give us a reasonable risk to reward ratio. But remember to always trade with reduced risk. Do not risk more than two percent of your account on a single trade, and never have more than three trades open at the same time.