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What is an order block in forex trading?

An order block is a price level where lots of people either want to buy or sell. Learn more about it in our educational guide.
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When it comes to trading, an order block is a price level where multiple market participants either want to buy or sell. An order block may indicate that a price is likely to fluctuate. This is because there is a lot of pressure either from buyers or sellers, whether it rises or falls depends on where that pressure is coming from. 

Highlights

  • Order blocks in forex are price levels where institutions attempt to buy or sell a foreign exchange pair without potentially having too much of an impact on the pair’s price.

  • Order blocks can be used to identify support and resistance levels and potential breakouts.

  • Order blocks cannot predict the future, so traders should do their own research and remember that prices can move in a direction that damages their position. 

What is a forex order block?

An order level in the foreign exchange (forex) market takes place when a bank or equivalent wants to place a large order. However, because the institution does not wish to destabilise the market, it will cut the order into chunks, or blocks, until they have reached their target. 

The idea is to make sure the bank can get hold of the money it wants without disrupting the market by either making things too expensive or too cheap. 

Order blocks are important because in forex, since forex trading is often carried out by large institutions, such as banks, there may often be situations where a strong market player sets up a particular high or low point – to use trading jargon, its support and resistance – for a currency pair’s price point. 

Over a certain period of time support and resistance levels represent the upper and lower boundaries of a currency pair’s price level. A trader can largely identify the support and resistance levels by looking at a price chart for a specific time period and seeing the low levels where its price went upwards and the high levels at which it dropped. 

On the other hand, an order block cannot necessarily be ascertained purely by looking at a price chart. This is because an order block is not based on historical price movements, but on the current level of market interest and activity at a specific price level.

Order blocks can also provide traders with valuable information about market trends and trades they may want to consider. For example, if a price breaks through an order block, it could be an indication of a change in trend or a shift in market sentiment.

How to identify an order block

Two potential order blocks on a EUR/USD price chart

There are number of techniques traders could utilise if they are interested in learning how to identify an order block in forex:

  • Look for clusters of price bars or candles, indicating that there is a significant level of buying or selling activity at that level.

  • Check the volume of trades around the price level. If there is a large volume of trades at a particular level, it could indicate an order block.

  • Look for patterns of consolidation or ranging on the chart, which can indicate that there is an order block at that level.

  • Use technical indicators. These can include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or Bollinger Bands could help identify potential order blocks.

  • Identify areas of significant support and resistance on the chart, which can often coincide with order blocks.

  • Check the news for events which could trigger order blocks as traders adjust their positions.

Examples of order blocks in forex trading

Let’s now look at some examples of order blocks in forex: 

  • Consolidation zones. Order blocks can form in consolidation zones where the price is more-or-less stagnant. In the example below, you can see an order block formed within the consolidation zone. The area of the block represents a zone where orders were placed in the past, creating support and resistance levels.

GBP/USD chart

  • Breakout zones. Order blocks can also form at breakout zones, areas of a map where a price has broken out of a consolidation zone. In the example below, you can see an order block formed at the breakout zone. This can be a potential area for traders to enter trades in the direction of the breakout.

  • Pullback zones: Pullback zones are places on a chart representing times when a price reverses from a notable upward trajectory. This could potentially be an area for traders to consider entering trades in the direction of the trend.

  • Reversal zones: Order blocks can also form at reversal zones, where price has reached a key support or resistance level and it could indicate that it may be likely to go back in the direction it came from. This could potentially be an area for traders to consider entering trades in the opposite direction of the trend.

Order blocks trading strategies

Order blocks in forex could potentially be used to help formulate a trading strategy. Someone who follows order blocks may note that the presence of an order block may identify support and resistance levels, which can suggest the way in which a market might turn. This could allow a trader to potentially buy or sell based on that information.

Traders could also utilise a set of order blocks, which all form in the same sort of way. This could be a good indication of what direction in the market is moving.

Traders could also make use of an order block to trade a breakout. When a price breaks out from an order block, that could potentially indicate a strong trend. Individuals could utilise that information to set up stop loss and take profit orders.

Order blocks could also be a useful tool to add to your trading arsenal, but it’s important to remember that they may be used in conjunction with other indicators and analysis techniques.

Conclusion

Order blocks in forex are an important concept. Understanding them could potentially help a trader with their trading decisions when it comes to interpreting a price chart and formulating a trading strategy based on that.

It is worth pointing out, though, that a forex order block might indicate that something either has happened or is currently happening, but it cannot predict the future. This means that traders will need to remember to do their own research, remember that the market can move against them, and never trade with more money than they can afford to lose. 

FAQs

What are order blocks in forex trading?

Order blocks are placed on a forex price chart where large sums of money have either been bought or sold in blocks by institutional investors.

How can traders utilise order blocks when trading forex?

A trader might use an order block when trading forex to give themselves an idea of potential support and resistance levels, as well as potentially suggesting where a breakout might take place.

Can order blocks help predict market trends?

Ultimately, no. While the presence of order blocks might suggest a range of things, they cannot predict the future. That is why traders should make sure they do their own research, never trade with more money than they can afford to lose and remember that markets can move against them at any time.

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