How To Find And Use ICT Order Blocks In Your Trading

Order block trading, a technique popularized by the Inner Circle Trader (ICT), offers insights into institutional buying and selling behavior.

What is an Order Block?

In ICT’s framework, an order block is a price area where substantial buy or sell orders from institutional traders have been placed. These blocks represent zones of high activity for different traders, acting as key liquidity zones and levels for future price reversals.

Today, I’ll explain the following:

The quickest way to manually identify order blocks

Order Blocks Uncovered: Understanding How And Why They Form In Forex

Order blocks describe a point where institutional traders enter a significant trading position against a previously large bullish or bearish candlestick.

Imagine the banks need to enter a huge buy or sell position, but they don’t want to send the market into a frenzy.

So, they whip out their secret weapon: block orders!

These sneaky, special orders let banks slip into colossal positions without upsetting price, ensuring they score the best prices and max out those profits.

Talk about playing it smooth!

Block orders split the banks positions into smaller, more manageable chunks, and then places them at similar prices. The result?

The banks massive position gets entered silently without triggering a huge price spike.

Pretty neat, huh?

Order Block Theory: Why The Banks Use Block Orders

Picture this: JP Morgan’s itching to buy a cool 200 million in EUR/USD, but they hit a snag – there’s only 50 million being sold right now.

Yikes!

Now, JP Morgan can’t just dive in and place that order; there aren’t enough sellers available. If they take the plunge and buy now, they’ll only buy 50 million. The remaining 150 million would get filled at sky-high prices, slashing profits and giving JP Morgan one heck of a headache.

The solution?

A block order, of course!

A block order will break the banks 200 million position into smaller chunks, allowing them to enter in a more manageable and discreet way without upsetting price too much.

For example: The banks initial 20 million order gets paired with 50 million on the sell side. No sudden price hike here – the sell orders still overshadow the buy orders, 50 million versus 20 million.

Then, once the orders rev up, the block order enters the next chunk.

That process – of placing one 20 million order, then another, and another, etc – causes a tight range consolidation to form, creating an order block zone.

Here’s what your typical bearish order-block looks like – seen one of these before? 

Notice the zone forms sits around a tight range consolidation – a consolidation contained within a small price range?

Order-blocks create these consolidations.

The banks use block orders to enter a large position without upsetting price. How’d they do that? By placing smaller positions around similar prices. That achieves the effect of placing a single large position albeit using smaller positions instead.

The banks placing positions around similar prices causes a tight range consolidation to form; each position creates a high (or low if they’re shorting) of the consolidation.

Before we move on, here’s a quick summary of order blocks:

Think of order blocks as supply and demand zones cousin.

They’ve got a similar vibe, but with a twist: they only pop up when price zooms away from a tight range consolidation.

A block order allows the banks to enter a large position, but it does so by scattering smaller positions at similar prices, which lets the banks emulate placing one massive position albeit using smaller orders, keeping price contained.

That makes it easier for the banks to buy/sell without upsetting the price.

How Order Blocks Are Different To Normal Supply And Demand Zones

So, order blocks are supply and demand zones – just a different type.

The question now is… how do they differ from the normal zones?

Really, there are two key differences…

Difference #1: Regardless of where or when they form, order blocks always outperform standard supply and demand zones.

Order blocks form via the banks buying or selling using a block order, which they only use when they have a large position to place. If they’re placing a big position, the banks don’t want price to break beyond the point they bought or sold.

Therefore, the zone has a high probability of causing a reversal because the banks wouldn’t place a big position unless they were very confident price was heading in the direction they want.

Difference #2: How order block zones form.

In general, order blocks form the same way as normal supply and demand zones: from a sudden, steep rise or decline away from a base.

So, what’s the difference then?

The base ALWAYS forms a tight range consolidation, like you see below.

Order blocks always form when price jets away from a tight range consolidation. That’s the structure created when the banks use a block order to enter their positions.

The block order enters each position at a similar price, causing the highs of the consolidation to form at almost equal prices.

The result?

A tight range consolidation.

To identify order blocks: Look for a tight range consolidation with almost equal highs and lows. They only form from the banks using block orders, meaning a zone MUST exist at the source.

Elevate Your Trading Strategy: How To Find And Use Order Blocks

Order-blocks perform best as a high probability side setup alongside your main trading strategy. The zones don’t appear often enough for a single strategy.

As a side setup, however, the zones can provide high probability trade signals to generate additional profit alongside your core strategy.

That’s how I use them, and I recommend you the same.

Supply and demand remains my core strategy, but I have two or three setups I look for alongside…

1. Order blocks.
2. Pin bars.
3. The reversal pattern in my book.

Using these patterns together allows me to make more money and lower my risk – due to the diversification they provide to my main trading strategy.

So, how do you find and use order blocks in your trading?

Since order blocks are supply and demand zones – just a much rarer type – you trade the zones using the same process:

1. Identify a tight range consolidation.
2. Mark a zone around the consolidation.
3. Wait for price to return and enter the zone.
4. Enter upon seeing a pin bar or engulfing pattern.
5. Take profits as price reverses and moves in your favor.

Easy, eh?

Here’s a quick example…

First: Find and mark a zone on the chart…

In this case I’ll use a bearish order block.

Pro Tip: Drawing order block zones follows the same rules as normal S&D zones. However, always include the entire consolidation in the zone. The block order enters positions all over the zone, so you must include the whole area for a correct zone.

Next: Wait for price to enter the zone and provide a confirmation signal.

For bullish order blocks:

• Bullish pin bar/hammer
• Bullish engulfing pattern
• Large bullish candle

For bearish order blocks:

• Bearish pin bar/hammer
• Bearish engulfing pattern
• Large bearish candle

Now: Place a stop on opposite edge of the zone and see if price reverses. Take profits by moving your stop as price moves in your expected direction.

Simple.

Finding the order blocks can prove tricky, but gets easier with practice.

The key point to remember: Look for consolidations created by a tight range, where the candles form a rectangle like structure.

That indicates the banks created the consolidation using a block order.

Therefore: An Order block must exist at the source and create a zone.

Let’s go through some examples…

Here’s your typical bullish order-block zone.

The zone forms after a move away from a tight range consolidation. Price moves back and forth between 1.21600 and 1.22000 before breaking higher, forming the order block zone.

Pay attention to the consolidation… notice how tight the range is?

Unlike normal consolidations where large price fluctuations creates large, uneven swings, the swings above appear small and terminate a similar prices. The leads to a tight price range, which price sits within until the breakout.

Here’s another one, from the 15 minute chart. 

Check the consolidation: it’s compact, tightly packed, and almost rectangular in appearance.

A clear sign a order block zone must exist at the source.

Sometimes, the consolidation will form after a move rather than at a swing low or high.

When it’s time to draw the order block zones, start with the freshest major swing low/high and stretch it to the consolidation – now you’ve got a zone that’s ready to rock!

Don’t Forget: Price may sometimes spike above the highs or below the lows of an order block before reversing. This move is designed to trigger stop orders and inject any remaining positions into the market.

The Bottom Line

Well, I hope this post has helped you understand order blocks a little better.

Order blocks, as I mentioned, make a great setup to watch for in addition to your main strategy; that is how I use them. Additionally, you can trade them at a slightly larger size because they have a much higher likelihood of causing a reversal than typical supply and demand zones. 

Neat, huh?