Mastering the art of trading with order blocks is a game-changer. In this guide, we will break down the 1-2-3 Order Blocks Trading Strategy and reveal techniques that banks and institutions use to dominate the market. By the end of this article, you will have a good understanding of order blocks and three powerful strategies to improve your trading performance.
What Are Order Blocks?
An order block is an important price zone where institutions or “smart money” place big trades that cause marked price movements. These zones then become important trading areas since the price often retests and reacts to them.
Types of Order Blocks
- Order blocks that are bullish: The price is formed by a large buy order, so the price goes up.
- Bearish order blocks: The price is formed by a large sell order, and the price falls.
While similar to support and resistance levels, order blocks differ in formation, structure, and frequency of retests.
Key Rules for Identifying Valid Order Blocks
To trade order blocks effectively, follow these three essential rules:
Rule 1: Presence of Imbalance (Gap)
An order block must create a gap (also called inefficiency). This occurs when there’s a noticeable gap between candles, indicating strong institutional activity.
Rule 2: Unmitigated Blocks
Order blocks are, in general, good for only one trade. Once a retest occurs, their strength is lost.
Rule 3: Break of Structure or Change of Character
The order block must break through and confirm a structural change in the market, which leads to momentum.
1-2-3 Order Block Trading Strategies
Strategy 1: Multi-Timeframe Confirmation
This strategy aims at confirming order blocks in higher and lower timeframes.
Steps:
- Identify an order block on a higher timeframe, such as daily or 4-hour chart.
- Confirm its validity by checking for inefficiency, untested zones, and structural breaks.
- Move to a lower timeframe (e.g., 15-minute chart) to identify bearish or bullish signals, such as candlestick patterns or MACD confirmations.
- Place trades with precise stop-loss and take-profit levels.
Pro Tip: Use a lower timeframe for fine-tuning entry points. For instance, pair a daily timeframe with a 1-hour chart or a 4-hour chart with a 15-minute chart.
Strategy 2: Inducement Traps
Inducement traps target setups where minor levels form near major order blocks.
Steps:
- Identify a major order block and a minor key level above or below it.
- Observe the price to break the minor level and retrace to the major order block.
- Place a limit order in the middle of the major order block, which ensures precise entries and reduced risk.
Example: Institutions are able to drive prices to major levels, where stop losses are hit, and are then able to re-enter lower.
Strategy 3: Breaker Blocks
Broken and previously valid order blocks will become new trading zones.
Steps
- Identify a previously valid order block that was broken by the price.
- Wait for the price to retrace to this break level.
- Use the break as a resistance zone on a bearish setup or as a support zone on a bullish setup.
Tip: Breaker blocks are generally effective only for one retest.
Why Use the 1-2-3 Order Block Trading Strategy?
- High Accuracy: By following institutional footprints, traders understand the key market movements.
- Risk Management: These strategies help outline specific entry, stop-loss, and take-profit levels.
- Scalability: It can be applied on any time frame and any instrument.
Conclusion
It’s the 1-2-3 Order Blocks trading strategy, a proven technique that allows for precise trades through high-probability institutional zones. Mastering basic skills and applying advanced techniques would help traders gain more profits and have a better chance of winning in a highly competitive market.