Forex Strategy : Order block is a market behaviour indicating the collection of orders from financial institutions and banks. The forex market is driven by prominent financial institutions and central banks. As a result, traders must understand what they are doing in the market. When the market creates an order block, it moves like a range, where most investing decisions are made.
Once the order building is completed, the market makes a sharp move to the upside and downside. The order block trading strategy’s key term is that it includes what institutional traders are doing. Because they are the primary price driver, any Forex Strategy that includes institutional trading may be successful.
What exactly is the Order Block?
Financial institutions do not invest in any trading instrument on the spur of the moment. They spend a lot of money on research in order to get the best trading results. Furthermore, they play with money that retail traders frequently find difficult to arrange.
Based on the availability of the price, smart money takes several steps in their trading. For example, if a bank wants to buy $100 million in EURUSD, it will go through three or four trade-in steps. They will take $20 million in the first step, $50 million in the second, and $30 million in the third. When the full quota of $100M is met, the price usually moves.
An order block appears to be a range, but not every range is an order block. Furthermore, we don’t know when or where the smart money will move. As a result, we will rely on the best price action and location to identify a suitable order block.
Aside from the order block, we must understand the order flow. When the price begins to move from an order block, it provides an order flow in any direction. Order flow from a higher timeframe indicates market direction, and we must find the order block pointing in that direction.
Trading Forex Strategy for Order Blocks
We’ve seen what the institutional order block and order flow are in the preceding section. In this trading strategy, we will use a daily timeframe of 1 hour to 4 hours to enter the trade and a weekly timeframe to identify the order flow. In addition, we will use the Fibonacci sequence to determine the potential location from which the market is expected to move.
Timeframe in Forex Strategy
The entry-level should take between one and four hours to identify.
The order flow is measured on a weekly basis.
Pair of currencies
The best part about this trading strategy is that it can generate profitable trades in any currency pair. We did extensive research, however, and discovered that it works well in all major currency pairs, including EURUSD, GBPUSD, and USDJPY.
Determine the Order Flow
On a weekly basis, we will look for a price that has tested an order block and is moving higher or lower. Once the test is completed and the movement begins, it will determine the direction.
We can see in the image above that the price moved higher and then sharply back towards the order block with impulsive bearish pressure, but it did not break the low. We will wait for the price to move higher with a candle close after the rejection candle. We discovered our weekly order flow once the candle closed.
We will then move to the H4 or daily timeframe and identify the order block to trade in the direction of the order flow.
The Order Block’s Location
Change to the H4 timeframe and draw the Fibonacci retracement from top to bottom. When drawing the Fibonacci level, make sure to use the most recent available price and not more than 200 candles. In addition, for a buy trade, draw the Fibonacci retracement from the highest to the lowest price.
After drawing the Fibonacci level, look for order blocks that are below the 50% Fibonacci retracement levels. Any price less than the 50% Fibonacci retracement level is the discount price, and any price greater than the 50% retracement level is the premium price.
In a bullish order block trading strategy, consider only the discount price, while in a bearish order block trading strategy, consider only the premium price.
Wait for the price to break above or below the order block in order to profit from an impulsive bullish or bearish pressure. The price will later make new highs or lows, but you should wait until it returns to the order block. Most of the time, the price will return to the order block and test the 50% level before making the final move.
As a result, if you do not want to monitor the price, you can place a pending order at the 50% level of the order block. The best practise, however, is to enter the trade once it begins to move away from the order block with a candle close above or below it.
Stop-Loss and Take-Profit Points
With some buffer, the stop loss level should be below or above the order block. To avoid unexpected market behaviour, use a buffer of 10 or 15 pips in most cases.
The standard take profit level, on the other hand, would be towards the order flow with a risk:reward ratio of 1:1. The final take profit level, however, is Fibonacci 0%, which is usually the top of the available price in a bullish condition and the bottom of the price in a bearish condition.
Let’s take a quick look at the order block trading strategy:
Determine the weekly order flow and its direction.
Using Fibonacci retracement levels, determine the premium and discount zone levels.
Navigate to the H1 to H4 timeframes and look for the order block within the Fibonacci 50 percent to 100 percent levels.
The price should move directly towards the order flow from the order block, but it should then return to test the order block.
When the price rejects the order block with a reversal candlestick, enter the trade.
In most currency pairs, the order block trading strategy is profitable. However, it is critical to remember that the forex market is extremely volatile. As traders, we anticipate the price, which is why we use stop losses. No trading strategy can guarantee a profit of one hundred percent. Although the Order block is a highly profitable trading strategy, you should follow proper trade management and money management rules to avoid unexpected market conditions.