In the next installment of Drift’s "Price Action Concepts 101" series, we’ll dive into orderblocks. For those who missed our first piece on Fair Value Gaps (FVGs), catch up by reading about FVGs here. This series aims to equip aspiring price action traders with the latest trading concepts and fundamentals to begin implementing these strategies on Drift.
Orderblocks are a widely utilized concept in price action trading. They refer to areas where large market players, often referred to as "smart money," have entered the market. By following these footprints left by big players, retail traders can gain insight into where large buyers may defend their positions. Similar to Fair Value Gaps, the origins of orderblocks are uncertain but believed to have been popularized by the Inner Circle Trader.
What Are Orderblocks?
Orderblocks are a key concept in price action trading, seen as a way of identifying supply and demand. A bearish orderblock represents supply and a bullish orderblock represents demand. Orderblocks, as the name suggests, are candles that indicate a high volume of orders taking place. These powerful orders alter the market structure and leave behind traces, which retail traders can use to their advantage.
Orderblocks are the last upward or downward candle prior to a significant market shift. While it may seem initially complex, it is a simple concept that can be easily understood through practice. Certain criteria must be met for an orderblock to be considered valid, such as:
- It must precede a break in market structure
- It must have created imbalances or Fair Value Gaps
There are two types of orderblocks:
- Bullish Orderblock: the last downward candle preceding a market structure break
- Bearish Orderblock: the last upward candle preceding a market structure break
Let's dive deeper into identifying these orderblocks.
How To Identify Orderblocks On Drift
As the illustration below illustrates, a bearish orderblock was formed when the 4hr green upward candle preceded a significant move in the opposite direction, creating imbalances and breaking market structure.
The chart above illustrates that once the orderblock was created, it served as resistance, offering traders an opportunity to enter into short positions.
Using Orderblocks To Your Advantage
Traders can capitalize on orderblocks by using them as entry points for trades. By identifying the beginning of an orderblock, traders can enter a position and place their stop loss below the orderblock. The target for these trades could be trend continuation or the next swing high/low in the direction of the newly established market structure. It's important to keep in mind that this is just one way to use orderblocks in trading and traders should consider their own risk management and strategy.
An example of utilizing a 15-minute orderblock to enter the market long is illustrated below:
It's important to note that just because an orderblock has been identified, it does not automatically indicate supply or demand. To make a well-informed decision, traders should also consider other forms of analysis, such as evaluating market sentiment, staying informed of relevant news, and examining market structure, before making a decision to enter a trade using the orderblock as a reference point.
Nothing in the text should constitute financial advice, Drift is not responsible for any losses that may occur by following the contents of this article. All content is provided here for educational purposes only.