As a retail trader, there are ‘big players’ in the Forex market that you should be aware of. These big players include participants like central banks and financial institutions. Considering their size, and the fact that they have more resources than a retail trader, they make large transactions that are divided into what we call order blocks.
What Order Blocks Are
Order blocks are zones on a price chart where these big players try to purchase or sell currency pairs without impacting the market too drastically.
They do this—try not to impact the market—because they have the ability to destabilize the entire market due to their large resources. If they were to pour all their resources into one trade, the market would be destabilized, causing the price to either skyrocket or drop, thereby making it less profitable for institutions.
To avoid this, they divide their orders into several much smaller trades, creating a backlog of orders that will be fulfilled without injuring the market.
On a price chart, order blocks appear as clusters of orders concentrated at a specific price level. These levels act as buffers, support and resistance, and are often key points for reversals and breakouts, generally coming before sharp market moves.
How To Spot Them
You want to be able to identify these order blocks because they provide you with advantages. Sometimes, it can be straightforward to identify them. Here’s what you should do:
1. Look for Engulfing Candlestick Patterns: Engulfing candlestick patterns contain two bars on a price chart. They indicate a market reversal. The second candlestick will be much larger than the first, completely covering or ‘engulfing’ the length of the previous bar. This pattern often appears at the end of a trend and signals the beginning of a new one.
2. Observe High Volume Areas: Order blocks are often found at areas of high trading volume, where large orders are being executed. This increased activity can cause a price level to act as a significant support or resistance zone.
3. Pay Attention to Price Consolidation Zones: Order blocks may also appear in areas where the price has been consolidating, moving sideways within a range. This consolidation is typically a result of large players accumulating or distributing positions without causing a significant price movement.
Why Order Blocks Matter to You
While order blocks don’t eventually destabilize currency pairs, they still impact the market. Understanding order blocks can be beneficial to retail traders in several ways:
1. Insight into Market Movements: Because these big players have more information than retail traders, they often act on market-moving news and trends before retail traders. By identifying order blocks, you can get a sense of where these players are positioning themselves and potentially align your trades accordingly.
2. Identify Key Price Levels: Order blocks can help you identify key support and resistance levels in the market. These levels are crucial for making trading decisions, such as setting entry and exit points, placing stop losses, and determining profit targets.
3. Anticipate Market Reversals and Breakouts: Since order blocks often precede significant market moves, recognizing them can help you anticipate potential reversals or breakouts. This foresight can enhance your trading strategy and improve your overall market analysis.
4. Enhanced Risk Management: By understanding where large orders are likely placed, you can better manage your risk. For example, you might avoid placing trades right before an anticipated large order block to prevent getting caught in sudden price movements.
Understanding order blocks is a valuable skill for any retail trader. By recognizing these zones where large players like central banks and financial institutions execute significant trades, you can gain insights into market trends, identify key price levels, and enhance your trading strategies. Order blocks serve as crucial indicators of market sentiment and potential turning points, offering you an edge in anticipating market movements.
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