How to Spot Central Banks Orders and Trade Forex Order Blocks (2024)

Forex order block

Order block is considered a market behavior that indicates the pile-up of orders from banks and institutions. The central banks and financial institutions mainly drive the forex market. Hence, traders should know what they are supposed to do. The market starts ranging while building the order block, and most of the investing decisions take place at that time.

The market tends to make a sharp move on either side once the order block is completed. The key behind order blocks is that it includes what giant institutions are doing.

What is the Order Block in forex?

Order blocks are special kinds of supply and demand zones formed when there is a block order. That’s why they bear such a name. It comes into place due to buying and selling of the banks.

If you are already familiar with order flow trading, then you might have heard of order blocks as well.

Banks use special orders for buying, selling, taking profit, and closing the orders. When banks want to open a position with volume, they do not randomly place a position to upset the price and trigger their order at a worse price that may result in lowering their profit.

For that purpose, they try to split their positions into small and manageable blocks using order blocks.

Here’s an example to elaborate on how it works.

Assume that Credit Suisse wants to place a buy order of 200 million on EUR/USD, but only 50 million are being sold. It is quite obvious that Credit Suisse may not be able to place its order as not many are selling it. If they place a buy order now, their 50 million order will be executed now while the remaining 150 million will be filled at an ever-increasing price resulting in lowering their profitability.

Hence, they decide to split their order and use order blocks to place and manage their position. If they split their position into chunks of 20 million, they will be able to place their order without upsetting the price.

For example, if they place their first chunk of a 20 million long order, it will not create a sudden jump in the price as selling is still greater than buying (50 million vs. 20 million). Then they can wait for more orders before placing the next chunk of long orders.

This process of placing chunks of orders results in creating a supply or demand zone from a tight consolidating range.

Here’s a typical order block zone:

Observe the new zone forms when the price escapes from the tight consolidation. These order blocks are responsible for creating such a consolidation.

We have prepared a video to help you understand how to trade Sideways Markets (consolidations):

How Does Order Block Trading Work?

The buying or selling party keeps full control over how they input their orders. Since the large orders may substantially affect the price of the asset, the order block customers may not be able to get the number or value of orders that they need.

Moreover, order blocks are regularly traded off, yet they should be accounted for to trade.

For example, one hedge fund may look to sell a 100k portion of a certain asset while another entity or a gathering is happy to buy the 100k. The gathering may perform this through a dark pool or with the help of a middleman. If the dark pool matches the transaction, the exchange takes place at a predefined price or at the midpoint of the ask and bid price.

If a mediator has been utilized, the order block may find someone to take the opposite side of the exchange. Contrarily, they may break the request into smaller pieces and then pass it to different brokerages or ECNs to cover the request size. They may forward the orders in a smaller size on multiple occasions and at numerous prices to minimize the impact of orders on the market.

How to Find and Use Order Blocks in Forex Trading?

The right way to make use of order blocks is to consider them as a high-probability trade setup alongside your key trading strategy. Order blocks are not usually formed; hence, they cannot be used as a single strategy.

If you use order blocks as a trade setup, you can find really high-probability trade entries, and you can use them to reap additional profits alongside your core trading strategy. Order blocks, pin bars, and reversal patterns can be combined to be used in the trading.

So, let’s see how to find the order blocks on the chart:

Order blocks are a rare type of supply or demand zones, so trading order blocks and supply/demand zones are the same.

Simply mark the zone on the chart.

Wait for a Doji, engulfing bar, or large range bar to appear, and then place the stop loss on the other side of the bar. Look for the price to move away.

Finding the zones can be a little hard for beginners, but practice can make it easier. All you need is to look closely at the area where the price is fluctuating in a very tight range. Such consolidations are formed only when banks place a block order. Hence, an order block should exist and establish a demand or supply zone.

Let’s go through an example.

This is what a typical order block looks like. This is a supply zone where prices remained encapsulated between 1.1911 and 1.1920 before breaking out on the lower side.

However, please notice that it is not a typical consolidation where price swings up and down at various prices. Rather in such a consolidation, the close price is almost the same.

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Bullish and Bearish Order Block

The order blocks are mainly of two types:

Bullish order block

A bearish bar or candle is formed before an upward move takes place. It results in breaking the structure and making a new high or higher high. Such a structure is anticipated to render support to the price.

Bearish order block

A bullish bar or candle is formed before a downward move takes place. It results in breaking the structure and making a new low or lower low. Such a structure is anticipated to render resistance to the price.

How do you draw an order block?

An order block appears after a strong uptrend or downtrend. Then the order block looks like a bottom or top. Price escapes the order block with high momentum breakout, or it results in a reversal of a trend. Price should not remain held in the order block for a longer period.

For drawing a bearish order block, simply mark the high of the rally and the recent swing low and draw a rectangle around it. Now extend the rectangle to the right into an empty area of the chart where the price will act or react in the near future.

Similarly, if you want to draw a bullish order block, look for a downtrend to pause. Then make the low and the recent swing high and draw a rectangle around it, extending to the right part of the chart.

After a few attempts, you will be able to draw accurate order blocks. It will just take a little patience and practice.

If you want to know more about supply and demand, the5ers prepare a special workshop, and I highly recommend watching it.

Forex order blocks summary

Order block is a market behavior that reveals the pile-up of orders by large entities. In forex, the order blocks are used by the banks to split their big orders into small chunks so that they get their orders filled at better prices without disturbing the market equilibrium. Order blocks are the same as supply and demand zones, but they are rare, and they can be applied to existing trading strategies as high probability setups. You can trade the breakout setups using order blocks. Order blocks are either bullish or bearish, and you can spot them at the end of a strong trend by marking low or high along with the swing high or swing low, respectively.

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