Let’s be real—how many times have we marked a support area thinking, “I’ll go long here,” only to watch the price reverse before your zone and take off without you? Feels unfair, right?
That’s where Order Blocks come in.
Order blocks are zones where smart money—aka big institutional players—execute their trades. These zones aren’t just random; they’re calculated areas where pending orders often remain, giving us a unique trading edge.
Smart Money Concept (SMC) Basics
Understanding Institutional Behavior
Unlike retail traders, institutions don’t throw down a market order and call it a day. Their position sizes are massive, and entering all at once would send the market skyrocketing or crashing.
So what do they do?
They layer their orders in a zone—an order block—to get filled without moving price too quickly.
Demand and Supply Zones
Think of an order block as a special kind of supply or demand zone, but smarter. It’s where intentional manipulation happens to trap retail traders and fill institutional orders.
Market Structure Essentials to Trade an Order Block in Trading
Higher Highs and Break of Structure (BoS)
In trending markets, price makes higher highs in an uptrend or lower lows in a downtrend. A Break of Structure (BoS) confirms a shift or continuation in trend and is a key signal for marking valid order blocks.
Liquidity Sweeps and Stop Loss Hunts
Ever wondered why the price spikes up just before dumping?
That’s a liquidity sweep—designed to hunt stops and create inducement, leaving behind a trail of trapped traders.
What is a Valid Order Block?
Common Misconceptions
Most traders label the last red candle before a bullish move as an order block. But if it hasn’t met the rules, it’s just a candle.
Order Block vs. Support/Resistance
Support and resistance are basic. Order blocks are strategic—they involve liquidity, inefficiency, inducement, and structure breaks.
Rules to Identify a Valid Order Block
Rule 1: Last Candle Liquidity Sweep
A valid order block must break the low/high of the previous candle—this is the liquidity sweep.
Bearish Sweep Example
- The red candle breaks the low of the previous green candle = Valid
Bullish Sweep Example
- The green candle breaks the high of the previous red candle = Valid
If there’s no break, it’s not valid. Simple.
Rule 2: Price Imbalance and Inefficiency
After the order block candle, if the price moves with strong momentum, a gap often forms between candle wicks. This is known as a Fair Value Gap (FVG) or price imbalance.
Spotting Imbalance
Draw a box between the wick high of the order block and the wick low of the third bullish candle. If there’s a gap = You’ve got an imbalance.
If the third candle’s wick touches the OB, it’s invalid—it already got filled.
Rule 3: Unmitigated Order Blocks
If price hasn’t yet touched the order block zone, it’s unmitigated = Valid.
If it’s already tapped once, it’s mitigated = Not reliable again.
Rule 4: Valid Break of Structure
If the price makes a clear BoS near the order block zone, it strengthens the case for a valid OB.
You need a clean move that breaks previous structure levels.
Rule 5: Inducement Trap
This is where smart money traps retail traders.
Price creates a fake breakout (inducement) above resistance or below support, then reverses into the order block. Trapped traders = liquidity = fuel for the real move.
How to Spot Order Blocks on the Chart
Take the 5-minute Nifty chart example:
- Market opens, pulls back, makes a new high = BoS
- A bearish red candle sweeps previous lows = Valid OB
- A strong bullish move follows, leaving an imbalance = Perfect setup
- Price returns to the OB = Entry point
Valid vs. Invalid Order Blocks
Invalid OBs
- No liquidity sweep
- No imbalance
- Already mitigated
- No BoS
Valid OBs
- Liquidity swept
- Clear imbalance
- Unmitigated
- Confirmed BoS
You may also like to read: Most Advanced Method to Trade Double Bottom W Pattern on Trading Chart
Types of Entry to Trade an Order Block in Trading
Entry 1: Top of OB
- Limit order at the top of the OB
- Stop loss at the bottom
Entry 2: 50% of OB
- Enter halfway through the OB zone
- Helps tighten the stop loss if OB is large
Entry 3: Bottom of OB
- Enter at the bottom wick
- High RR but high risk of missing entry
Entry Techniques Explained
Use limit orders and buffer zones around OBs.
Stop loss must always be used—order blocks aren’t magic.
Risk 1-2% max per trade, and let OBs guide your direction.
Mistakes to Avoid
- Don’t assume every big red/green candle is an OB
- Always check for imbalance, sweep, and BoS
- One OB = one use. After mitigation, it’s dead.
Bullish vs Bearish Order Blocks
In an uptrend? Look for bullish OBs to go long.
Downtrend? Focus on bearish OBs to go short.
Stick with the trend direction for better odds.
Order Block Lifecycle
- Valid when unmitigated
- Mitigated after the price touches it
- Obsolete once used
Mark and update your zones regularly.
Advanced Tips
- Combine OBs with liquidity zones
- Use Fair Value Gaps for sniper entries
- Confirm with RSI, volume, or MACD
Recap of Key Points
- Order blocks = smart money zones
- Valid OBs follow 4–5 clear rules
- Entry types vary; pick one that suits your risk appetite
- Don’t reuse OBs after mitigation
- Always use a stop loss
Conclusion
Mastering the art of trading order blocks is like learning the secret language of the market. Once you see what smart money is doing, everything changes. You’re no longer reacting—you’re anticipating.
Stick to the rules, be patient, and let the market come to your zone. Happy Trading!
FAQs
1. What is the best timeframe to trade order blocks?
While they work on all timeframes, higher timeframes (1H, 4H, Daily) give more reliable signals. Use lower timeframes (5M, 15M) for precision entries.
2. Can order blocks work in forex and crypto?
Absolutely! Order blocks are a universal price action concept and apply across all liquid markets, including stocks, forex, and crypto.
3. How do I know if an order block will hold?
Check for:
- Liquidity sweep
- Price imbalance
- Unmitigated zone
- Valid break of structure
If all conditions are met, it has a high probability of working.
4. Is the Smart Money Concept reliable?
Yes, but only when used with clear rules and discipline. It’s not a guaranteed win, but it gives deeper insight than basic indicators.
5. Can I automate order block trading?
Yes, some traders use algorithms or custom indicators to detect valid OBs, but nothing beats learning the logic behind them manually first.