Order block: types and advantages
An order block is a defined area of supply and demand within which market participants can place large orders. These orders put pressure on the price dynamics, which can lead to sharp spikes. To avoid this, orders get split into multiple order blocks and as soon as the counter orders accumulate a certain amount of liquidity, these blocks start to execute. This approach benefits institutional traders, such as central banks, allowing them to execute large orders without affecting prices.
There are two types of blocks:
– Bullish order blocks. They appear during a bearish trend that favours an upward price reversal. Such a block can be identified by the last downward closing candle followed by an upward closing candle. The last candle goes above the level of the previous candle. The first candle, bearish, contains buy order blocks, while the second candle, bullish, contains buy orders.
– Bearish order blocks are the mirror image of candlesticks, where buyers’ blocks cause the price to rise, but the large number of orders prevents it from rising above the opening level.
Functions of the order block
In the Forex market, order blocks can serve various functions. For example, they can act as support and resistance zones. The price moves within the range created by the orders. Order blocks also form stop losses, which traders use to prevent potential losses. When the price enters this zone, several positions are activated, which can lead to a trend reversal.
The appearance of order blocks can indicate a change in the direction of the trend, which can either begin to decline or increase. One of the reasons for such changes will be the actions of a large investor. For example, they may have watched the price of an asset fall over a period of time, and at a certain level of value, they begin to buy it in parts. Such actions can lead to a price reversal, but the market does not immediately feel the intense pressure because the buying is done in parts. The dynamics of change are slow, which favours a reasonable price for traders’ orders.
Liquidity in Forex comes from large trading volumes. In order for a block of buy orders to meet the necessary conditions, the market must regularly receive a sufficient number of orders. In this case, sellers are interested in driving the price down, and buyers have to accept the orders.
The analysis of order block allows us to determine the levels of stop fixation. As well as the zones of market entry and exit. For example, thanks to a timely reaction to the trend movement, it is possible to get a higher profit than planned in advance.