What is order block theory?

<p id="isPasted">An order block is a zone where traders place stop losses to protect positions from potential losses. When the price reaches this area, many of them can be triggered, leading to a trend reversal.</p><p>In shorter timeframes, order blocks look like a consolidation range. This is where a large investor evenly distributes orders that are executed gradually, resulting in a smooth price change. In longer timeframes, an engulfing candle is visible.</p>

<p id="isPasted">Order block theory is a trading concept that identifies specific price zones on a chart where large institutional traders (like banks and hedge funds) have placed significant buy or sell orders. These areas act as "footprints" of institutional activity, often leading to strong support or resistance levels where the price is likely to react in the future.&nbsp;</p><p><strong>Key Concepts</strong></p><ul><li>Institutional Activity: Large players cannot execute massive orders all at once without causing major price spikes, so they break them down into smaller "blocks" over a short period. This leaves behind a price area of high liquidity.</li><li>Price Reaction: The theory suggests that when the price revisits an unmitigated (untested) order block, the remaining institutional orders in that zone will be filled, causing the price to reverse or consolidate before continuing the initial move.</li><li>Smart Money Concepts (SMC): Order blocks are a central component of the SMC methodology, which aims to help retail traders align their strategies with the actions of major market participants to improve entry and exit timing. </li></ul><p><strong>Identifying an Order Block</strong></p><p>Valid order blocks generally have specific characteristics:</p><ul><li>Origin Candle: It is typically the last bullish candle before a sharp drop (bearish order block) or the last bearish candle before a strong rally (bullish order block).</li><li>Displacement &amp; Imbalance: The move away from the order block should be swift and one-sided, leaving behind a price "inefficiency" or Fair Value Gap (FVG). This confirms strong institutional intent.</li><li>Break of Structure (BOS): A valid order block should lead to a break of a previous swing high or low, indicating a shift in market control.</li><li>Liquidity Sweep: Often, the price will first dip below a prior low (for a bullish OB) or rise above a prior high (for a bearish OB) to capture existing stop orders (liquidity) before the main move begins. </li></ul><p>Traders use order blocks to identify high-probability entry points and to set precise stop-loss and take-profit levels.&nbsp;</p>