What is an Order Block? - Smart Money Pros

Have you ever heard of an Order Block? It’s a neat concept in Smart Money trading. It’s a specific area on the price chart where significant institutional buying or selling has gone down. These areas usually come before major price movements and can serve as strong support or resistance levels in the future.

Here are the key things:

Institutional Footprint: Order blocks are where large financial institutions, also known as “smart money,” have placed substantial orders. They do this in smaller chunks to avoid causing huge market swings, creating a noticeable pattern on the chart that traders can spot.
Tight Consolidation: Before a significant price move, the market tends to stay in a narrow range, forming the order block as institutions gather or distribute large positions.
Impulse Moves: After the consolidation, a sharp price movement (impulse move) usually breaks out of the range. This confirms the order block and shows evident institutional activity.
Future Price Interaction: Order blocks can act as future support or resistance levels. Prices often retrace to these levels before moving in the direction of the initial impulse move, which helps traders align with institutional interests.

Bullish and Bearish Order Blocks:

Bullish Order Block: This appears before a significant upward movement as a consolidation before a breakout to the upside, indicating strong buying interest.
Bearish Order Block: This appears before a significant downward movement as a consolidation before a breakout to the downside, indicating strong selling interest.

Mitigation:
Institutions often revisit their order blocks to “mitigate” remaining orders not fully executed during the initial move. This gives traders opportunities to enter trades as prices usually return to these zones.

Example of How to Use Order Blocks in Trading:

Identification: Look for consolidation on the chart followed by an impulsive move and mark the consolidation zone as an order block.
Confirmation: Wait for the price to return to the order block. This is often where institutions mitigate their orders, providing a trade entry opportunity.
Entry and Exit: Enter the trade at the order block, with a stop-loss just beyond the block’s boundary. Depending on the trade direction, the target can be set at a previous high or low.

To sum it up, Order blocks are powerful tools for identifying areas of significant institutional activity. By understanding and applying this concept, traders can align themselves with smart money movements and boost their chances of successful trades. Happy trading!