Understanding ICT Order Blocks in Trading - [TFlab]

An ICT Order Block refers to a specific area on a price chart where a substantial number of orders are executed by institutional traders, often referred to as "smart money." In the context of Forex education, understanding these order blocks is crucial, as they lead to abrupt and powerful market movements. Retail traders observe these significant shifts as indicators of smart money activity, positioning themselves to enter trades when prices retrace to these critical areas. This knowledge allows Forex traders to make informed decisions and potentially capitalize on price actions influenced by institutional trading.

Types of Order Blocks
The market typically demonstrates two primary types of price movements:

1. Upward
2. Downward

Based on these movements, order blocks are categorized into two types:

Bullish Order Block (OB+)
A Bullish Order Block signifies a zone on the price chart characterized by considerable buying pressure, leading to a swift upward market movement. Typically, this block consists of the last bearish candle preceding a robust bullish surge, often featuring two candles: the first being bearish and followed by a strong bullish engulfing candle.

Identifying a Bullish Order Block
To confirm a valid bullish order block, the following criteria should be met:

1. The second bullish candle must eliminate liquidity below the previous bearish candle.
2. The second bullish candle must close above the high of the preceding bearish candle.
3. There should be an imbalance in lower timeframes within the order block area.
4. A Market Structure Shift (MSS) must be evident in lower timeframes.

In essence, the second candle should completely engulf the first candle.

Bearish Order Block (OB-)
Conversely, a Bearish Order Block represents an area where significant selling pressure causes a rapid downward market movement. This block typically consists of a bullish candle followed by a strong bearish engulfing candle.

Identifying a Bearish Order Block
To identify a valid bearish order block, ensure the following:

1. The second bearish candle must take out liquidity above the previous bullish candle.
2. The second bearish candle must close below the low of the preceding bullish candle.
3. An imbalance should be present in lower timeframes within the order block area.
4. A Market Structure Shift (MSS) must be observable in lower timeframes.

Again, the second candle must fully engulf the first candle.

How to Trade a Bullish ICT Order Block
To trade effectively using a Bullish ICT Order Block, adhere to these guidelines:

1. Identify the Market Order Flow: Assess the prevailing market trend.
2. Validate in an Uptrend: Bullish order blocks are most reliable in uptrends; in downtrends, they may only provide short-term reversals.
3. Identify a Valid Bullish ICT Order Block: Look for key areas that exhibit strong bullish setups.
4. Wait for Price Return to Order Block: Upon identification, wait for the price to retrace to the bullish order block.
5. Entry at 50% Retracement: Initiate a buy trade near the block's 50% retracement level.
6. Confirm with Lower Timeframes: Utilize lower timeframes (e.g., 15 or 5 minutes) for confirmation, such as observing market structure shifts.

How to Trade a Bearish ICT Order Block
For trading based on a Bearish ICT Order Block, follow these steps:

1. Identify the Market Order Flow: Determine the prevailing market trend.
2. Validate in a Downtrend: Bearish order blocks are more reliable in downtrends; in uptrends, they may only offer short-term reversals.
3. Identify a Valid Bearish ICT Order Block: Seek key areas with strong bearish setups.
4. Wait for Price Return to Order Block: Once identified, wait for the price to return to the bearish order block.
5. Entry at 50% Retracement: Initiate a sell trade around the block's 50% retracement level.
6. Confirm with Lower Timeframes: Use lower timeframes (e.g., 15 or 5 minutes) for confirmation, such as market structure shifts.

Stop Loss and Take Profit for Order Block Trades
When trading based on bullish or bearish order blocks:

1. Position the stop loss a few pips below or above the order block.
2. For profit-taking, target the next significant liquidity level.
3. Always risk no more than 1% of your capital on a single trade.

Final Notes
Order blocks may also manifest after pullbacks within trends, reinforcing the strength of the trend. For example, in a downtrend, a bearish order block may form following a bullish pullback, confirming the downtrend and presenting a new selling opportunity. Similarly, in an uptrend, a bullish order block may arise after a bearish pullback, affirming the uptrend and offering a new buying opportunity.