There’s a difference between an untrained person just looking at, and observing charts and someone who actually knows what they are looking for. Most traders overlook what can actually be perfect setups for trades. What you really want to try and understand is what institutional money is doing. If you can stack your pennies next to their dollars, you stand a better chance of success. This is where the concept of order blocks comes in.
But what is an order block? Essentially, it is a zone on the price chart of a financial instrument where “big money” or institutional traders and investors (banks, hedge funds) placed massive orders that caused a very notable shift in market direction. They give vauable insight into the broader market context.
The real value of order blocks is that they represent the most accurate gauge of actual market activity — price action. And for prop firm traders (where you need a consistent edge), mastering order blocks can be the difference between getting funded or not.
How Are Order Blocks Different from Support and Resistance?
Traditional support and resistance zones are valuable, and they do offer some value. But order blocks go deeper because they try to pinpoint institutional order flow, rather than just an area where price previously bounced.
If you can identify order blocks correctly, you’re doing more than drawing horizontal lines. You’re spotting the final opposite-coloured candle before a sharp, decisive move. That candle often marks a zone where institutional traders left unfilled orders—what ICT calls “unfinished business.” Price tends to return to these areas because those large players usually did not get their full positions filled during the initial move.
Understanding Bullish and Bearish Order Blocks
Let's break the concept down by looking at the 2 main types of order blocks: bullish order blocks and bearish order blocks. The logic behind both is identical.
Bullish Order Blocks
A bullish order block is formed where you see a strong upward price movement (impulsive move) and trace it back to the last bearish candle before the move happened. That candle represents the place where institutional money stepped in and absorbed all the selling pressure, pushing the price up.
As the price is falling, retail traders usually panic and start selling. Then, institutional money steps in and buys (for example), pushing the price in the opposite direction. Then, if the price returns to that zone later (as can happen), those same institutions often add to their positions, creating another price “bounce”.
Bearish Order Blocks
A bearish order block is basically the same concept—but in reverse.
Flip everything around, and you've got your bearish order block. This forms at the last bullish candle before a significant downward move. It's where institutional sellers stepped in, absorbed all the buying pressure, and then sent the price tumbling.
The last bullish candle before a sharp drop is your bearish order block zone. When price returns to test that level, institutional sellers might defend it again, pushing price lower.
The ICT Order Block Methodology
The Inner Circle Trader (ICT) approach to order blocks really changed how serious traders think about smart money concepts. Michael Huddleston's ICT order block methodology goes beyond just marking boxes on charts—it's about understanding institutional trading behavior and how large market participants operate.
In the ICT framework, order blocks aren't standalone signals. They work in conjunction with:
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Fair value gaps (FVG) - imbalances in price that often get filled
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Market structure breaks and shifts
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Liquidity sweeps above and below key levels
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Session timing (best when institutions are most active)
Timing your trades around sessions matters more than a lot of people realize. Unlike retail traders, institutions aren't active 24/7 and this definitely shows up in the market. When big money institutions start actively trading during London and New York sessions, certain trading zones become a lot more relevant than they may have been.
This is one of the primary reasons the ICT's view on order blocks makes so much sense. It's about trying to ask the same questions big money traders ask:
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Where do they need to get filled?
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What orders didn’t execute the first time?
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Which levels would they defend if price bounced back?
The reality is that the same order block may behave very differently depending on the environment. For example, in a trending market, the zone could act like a trampoline and "bounce" the price in the opposite direction.
But in a choppy market, it may just chew through the price before it reverses. Also, a trading block near London's session high is not the same as one floating around in the middle of an Asian market lull.
How to Identify Order Blocks?
Okay, so if you've never actually traded order blocks before, how do you find them on the chart?
Here's a general guide to locating them so you can take advantage of them when they come around.
Spot the Move First
When you're looking for the price move, remember it's an aggressive and sudden move—not a slow grind up or down.
Work Backwards
Once you've located the spot where there was a sudden, sharp change in price behavior, you need to work backwards from there. So, you'll want to trace back to the final candle that formed in the opposite direction. This is usually where institutions were stacking buy/sell orders before the market jumped.
Check the Context
Remember, not every opposite candle carries the same weight. You still need to look for other clues:
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Did the price break market structure afterwards?
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Was the move a forceful one or just a shuffle?
Mark the Zone
Lastly, you'll want to mark the order block zone. Some traders only mark the candle body, but others use the whole wick. There’s no one-size-fits-all rule, but most institutions spread their orders across that whole range, so keeping the full zone visible usually helps.
Trading Order Blocks: Strategies and Techniques
Once you've become accustomed to identifying order blocks, that's only half the battle. You need actual strategies to be able to trade them.
Here are a few strategies and ideas you can use once you've identified an order block.
The Retest and Rejection Strategy
This is arguably the most common approach traders use together with order blocks. When using this strategy, you'll want to wait for the price to come back towards the order block zone you've identified and then look for signs of the price being rejected.
For a bullish order block:
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Price drops back into the zone
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You watch for bullish candle formations
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Enter on the break above the rejection candle
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Place your stop loss just below the order block zone
For a bearish order block:
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Price rallies back into the zone
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You look out for bearish rejection signals
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Enter your trade just below the rejection candle
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Set a stop loss just above the order block zone
Combining Order Blocks with Fair Value Gaps
When an order block aligns with a fair value gap (FVG), you've got multiple confirmations of a good trade entry that's pretty hard to ignore.
A fair value gap happens when the price moves so fast that it leaves an imbalance—three candles where the wick of candle one doesn't touch the wick of candle three. These gaps often get filled as the price "balances" itself.
When you find an order block that also sits inside a fair value gap, that’s a great place to enter a trade. In a case like this, you have “double confirmation”: institutions left orders at the block, and there's an imbalance that price needs to fill.
Lower Timeframe Confirmation
Here's an underrated strategy that separates profitable order block traders from those who struggle: dropping to a lower timeframe for precise entries.
Say you identify an order block on the 4-hour chart. You can then zoom into the 15-minute or 5-minute chart when the price approaches the order block. On that lower timeframe, you can often spot:
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Mini market structure shifts confirming the reversal
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Liquidity grabs (stop hunts) right at the edge of your zone
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Cleaner entry triggers with tighter stops
This approach keeps your directional bias from the higher timeframe while giving you more precision on entries.
Incorporating Order Blocks into Your Complete Trading Strategy
When it comes to trading, the best approach is to have multiple tools in your trading box, and order blocks is just another one to add. They’re most powerful when used together with a trading strategy that also considers multiple other factors, such as the following.
Market Structure
Before using trading blocks for trade entries and exits, consider the overall structure of the market. Is the market trending or ranging? If trending, in which direction?
If the market is in a strong uptrend, you should probably focus on trading bullish order blocks during pullbacks. There’s a saying: “Don’t fight the trend”, which is usually the smartest approach.
If the market is more of a ranging one, the order blocks at the edges of the range are typically the best entry and exit points.
Using Order Blocks with Other Tools
Order blocks work best when used together with other tools, indicators and insights. It’s not that you necessarily need 5 confirmations, but having at least 2 or 3 “confirmations” that point in the right direction makes the setup stronger.
Here are a few examples:
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Fair Value Gaps (FVGs) – These are small “holes” in price where the market moved too fast. If an order block sits inside one, it’s a strong sign that “big money” was active there.
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Liquidity Zones – These are obvious levels where traders place stop losses. If an order block sits just past one of these levels, it often means smart money is hunting stops before reversing price.
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Fibonacci Levels – Some traders watch certain retracement levels like 0.618. If an order block lines up with one, it can act like extra support or resistance.
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Session Timing – The London and New York sessions usually have the most volume. Order blocks formed or tested during these times tend to matter more.
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Market Sentiment – If the whole market is in a “risk-on” mood (people buying risky assets), bullish order blocks work better. If it’s “risk-off,” bearish setups are safer.
You don’t need everything on this list. Two or three solid reasons to take a trade are enough. More than that is a bonus.
Risk Management for Order Block Traders
Order block trading is no different to any other trading strategy, in that risk management remains a cornerstone. Just because you think you may have found an edge, risk management remains super important.
Here are some of the main considerations:
1. Stop Loss Placement
For order block trades, you'll want to position yourself just outside the order block.
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For a bullish trade → place the stop a bit below the block
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For a bearish trade → place the stop a little above the block
If the price breaks through your zone, you'll want to be out quickly, which is where a stop loss is really valuable.
2. Position Size
The golden trading rule is to never risk more than 2% of your position on any one trade—even if you have a strong setup, with multiple confirmations. It's better to have several small wins and one or two minor losses, rather than several big ones and one catastrophic loss, which usually wipes out the gains from several winners.
3. Taking Partial Profits
Taking partial profits is a sound trading practice, and especially when trading around order blocks. Some traders take some profit off the table at the first major high or low—and then let the rest run. his locks in some gains while allowing the position room to potentially continue in your direction.'
4. Maximum Drawdown Rules (Prop Firm Tip)
When it comes to prop firms, there's almost always strict loss limits in place (some more than others). Once you hit your daily or weekly stop, it’s probably good to stop trading—even if the next setup looks perfect. Discipline beats chasing a “home run” over the long haul.
Valid Order Blocks vs. Weak Order Blocks
It can be easy to spot any type of order block and immediately want to rush into a trade. But, this is not always a good idea. Here are a few pointers to help you distinguish between valid and weak order blocks.
Valid order blocks:
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Strong impulsive moves away from the zone (not gradual moves)
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A clear market structure breaks immediately after
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Alignment with higher timeframe bias
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Fresh (untested) or only tested once previously
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Located at significant price levels (swing highs/lows, round numbers)
Weak order blocks:
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Weak follow-through after the supposed "institutional" candle
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Multiple tests already (diminishing returns each time)
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Mid-structure location with no clear swing point
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Misalignment with the broader market direction
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Small-timeframe blocks that contradict higher-timeframe blocks
Learning to spot valid order blocks and ignore weak order blocks takes some time and practice, but these general guidelines should help you recognize the difference a bit easier.
Order Block Trading for Prop Firms
If you’re trying to pass a prop firm challenge or actively trade a funded account, there are a few nuances to be aware of when it comes to trading order blocks and prop firm rules.
Drawdown Limits: Most prop firms have strict daily and total drawdown limits (usually 5% daily, 10% total). This means you cannot be too aggressive with position sizing. Your order block trades need to be very selective.
Trade Management: Some prop firms don't allow holding trades over the weekend or through news events. This may affect which order block setups you can take. For example, you may spot a perfect Friday afternoon setup, but may have to pass on it.
Consistency Requirements: Prop firms want to see consistent profitability, not just a few lucky days here and there. This could actually favor order block trading because the strategy provides regular setups if used correctly.
The Psychology of Trading Order Blocks
Something underrated about order block trading: the psychological edge it provides. When you understand where institutional money is positioned, you trade with more confidence and less emotional reactivity.
Trading With Institutional Logic
Most retail traders get stuck in the habit of chasing the price. When the price starts to go up, they want to jump on the bullish train. But when the price goes down, they start panicking and want to get out of their positions.
But people who trade around order blocks try and tap into what institutions are thinking—but more than that, what they are actually doing. This can help predict future price movements.
That's the key difference—not just reacting to what price did, but actually anticipating what institutions will do next.
Leveraging Patience to Your Advantage
With order blocks, you have a clear "marker" of when to enter and exit your trades. Using a bunch of different indicators is something many traders find confusing and is often more of a hindrance than a help.
Because order blocks are more specific, they force traders to be patient and wait it out for the right setup before entering a trade.
Handling Losing Trades
Using an order block trading strategy can actually help manage losing trades. The reason it does is because you are never guessing when to trade—you are following a clear path, and therefore not relying on your own emotions (and thereby beating yourself up).
If a trade does not work out, you can analyze it and determine whether you identified the order block incorrectly, whether your risk management was off, and if institutional bias changed. Either way, you can address the matter systematically, and move on to the next trade. Remember, it's all about putting the odds in your favor, not seeking to win every single time.
The Edge in Order Block Trading
The same principle that applies to other trading strategies also applies to order block trading. It's not about perfect – but rather about trying to position yourself alongside what institutional money is doing and let the odds and probabilities play out in your favor.
Remember that it's large institutions that actually move the markets. Banks, hedge funds and pension funds move millions or billions of dollars and these footprints can be seen in the charts – if you just know where to look.
As with any trading strategy, it's not foolproof and doesn't work every time, which is why risk management remains important.
For prop firm traders in particular, the order block trading strategy offers something clear and repeatable that you can scale up as you get better at spotting order blocks.
Once you learn to spot order blocks, you develop a skill that can support your trading approach across different markets and styles.
