Order Blocks
The candle that preceded a strong move
The definition
A bullish order block is the last down candle before a strong move upward. A bearish order block is the last up candle before a strong move downward. The zone is drawn across that candle, usually from its open to its low for a bullish block.
Bullish order block
Order block zone
The last down candle before the move up. The zone is drawn across this candle, typically from its open down to its low.
A strong impulsive move away from the zone. The stronger and faster this move, the more significant the block is considered.
Price returns to the zone. Traders watch for the move to resume from here rather than passing straight through.
A bearish order block is the mirror image: the last up candle before a strong move down.
The reasoning behind it
The idea is that a large buyer cannot fill an entire position at once without pushing price away from themselves. Some of the intended orders remain unfilled when the move begins. When price returns to that area, the remaining interest is still there, which is why the level is expected to hold.
Whether this is literally what happens is not verifiable from a retail chart. What can be observed is that price frequently does return to these areas before continuing, which is the part worth testing on your own data.
What separates a stronger block from a weaker one
- The move away from it was impulsive rather than gradual, ideally breaking structure in the process.
- It formed after liquidity was taken, such as a sweep of a nearby high or low.
- It sits in the correct half of the range, meaning a bullish block in discount rather than in premium.
- It has not already been returned to and traded through several times.
A block that has been revisited repeatedly is generally considered spent, on the reasoning that whatever unfilled interest was there has since been absorbed.
Using it as an entry
The typical approach is to wait for price to return into the zone rather than chasing the initial move, place the stop beyond the far side of the block, and target the next structural level or pool of liquidity.
This is where position sizing does the real work. The distance from entry to the far side of the block defines your stop, and the position size follows from that distance and your fixed risk percentage, not from how confident the setup looks.
A complete setup, start to finish
GBPUSD sweeps a low, then rallies impulsively. The last down candle before that rally opened at 1.2680 and had a low of 1.2665. That 15 pip band is the block.
Price later returns to 1.2678. Entry there, stop below the block at 1.2660, so 18 pips of risk. Target is the previous high at 1.2750, which is 72 pips away.
That is a reward to risk of 4:1. On a $10,000 account risking 1%, the 18 pip stop gives a position of roughly 0.55 lots. Being wrong costs $100. Being right returns around $400.
Order blocks are identified after the impulsive move has already happened, which makes historical charts look far cleaner than live ones. On any chart there are also several candidate blocks at once, and only some will hold.
Log which block you chose and why, then review across many trades whether your selection criteria actually produce better outcomes than picking a different one would have.