Order blocks are considered interesting areas to execute trading opportunities, but do you know why some of the order blocks work perfectly fine while others get ignored by the market?

To answer this question, we backtested more than 100 order blocks under different conditions to find out the characteristics of high-quality order blocks that are being respected by the market.

We applied multiple rules to see if they really increased the win rate of order blocks and backtesting results.

We concluded that, order blocks work under certain conditions, when some repetitive patterns happen in the market.

So in this video, first, we will explain the basic rules and a simple setup for trading the order blocks, and we will show you the backtesting results.

Second, we will describe the conditions required for high-probability order blocks, and how to increase the win rate.

So guys, if that's something you are interested in, make sure to smash the like button to show your support and subscribe to our channel if you are new since we publish many advanced trading concepts.

So first, let me explain some of the primary rules about order blocks and the smart money concepts.

Basically, we consider the last candle that created the inefficiency as the order block zone, which we believe that the decisions are made during this candle.

Sometimes, order blocks are at the start of an impulsive move, and sometimes in the middle of the movement in the form of a candle with the same or opposite color.

We have three major rules for identifying a valid order block.

First, it must create inefficiency.

Inefficiency occurs when we have drastic moves that create gaps between the shadows.

These are examples of efficient and inefficient moves.

Second, it must lead to a break of the structure or a change of character.

A break of structure or change of character is the first clue that the market is telling us whether it intends to continue in the same direction or reverse.

Third, it must be unmitigated.

Order blocks are one-time use, so we only look for trading opportunities when the first-time price taps into an order block.

Here on the EURUSD 15-minute chart, let's spot the order blocks.

Starting from the left, these are the areas where we have clear inefficiency on the chart.

So we mark the candles that created the inefficiency as our order blocks if they lead to a break of structure or change of character.

So all of them consider valid order blocks according to our rules.

Now, let me explain the steps of the trading strategy we used for the back-testing order blocks.

The rules for this trading setup are easy.

Identify a valid order block, place your order at the beginning of the order block zone, and put your stop-loss at the end.

We target two times our stop-loss range for the profits.

This way, even with a 34% win rate, we will still be at break-even.

We have back-tested this trading setup 100 times on EURUSD pair in the 1-hour time frame.

For the back-testing, we used Trader Edge software which allows us to save so much time while back-testing our strategies.

We set our initial account size at $10,000 with 2% risk, targeting 4% profits.

Now let me show you the results we have got.

These are the 100 order blocks we have spotted on the chart.

The green order blocks you see are the trades that hit our 1-to-2 target and ended up winning.

The red order blocks are the trades that ended up losing, and the grey order blocks are the ones the market did not trigger, and finally, we cancelled the trades.

So these are the back-testing results we have got from 100 order blocks setup, 28 did not trade setups.

Our win rate was 43% and we suffered a 10% maximum drawdown.

Although our win rate was less than 50%, this trading setup raised our initial account size by 47%.

In the back-testing, we have realized that when certain conditions accompany order blocks, the chance of winning the trades significantly improves.

We also noticed repetitive patterns form on the chart that dramatically increases trading returns.

So let me explain to you what conditions are required to identify a high-quality order block.

But before we continue, as always, please smash the like button to show your support, since this video took a long time to make for our team.

Also, if you have any questions, please ask them in the comments, since we do our best to answer them all.

The factors that should be considered when trading order blocks are summarized in 4 categories, including market structure, market volatility and spread, market trends and recent order blocks, confirmations and lower time frames.

Let's start with the market structure.

Let me show you some of the most common market structure patterns that happen every day.

Here we have a valid order block and a potential trading opportunity to go long.

But looking at the left side, we can spot this gap between the candles, precisely below the first order block, and another valid order block zone here.

Now, there is a high chance for the price to come and fill the gap.

Grab the liquidity below the first order block and continue pushing up when it taps into the second order block.

So when this pattern is formed, and we have a gap and another valid order block precisely under the first one, we give the first order block minus 1 point for trading.

Also, remember that breaking below the first order block does not necessarily mean a reversal is coming since there is a high chance that this break is just a liquidity grab for future movements.

On the contrary, look at the second pattern.

Here we have a valid order block and looking at the left, we can see that.

This move has swept the liquidity under these equal lows, which can fuel future movements.

So when this pattern is formed, and we have an order block that grabs the liquidity under or above the equal lows and highs, we give it a plus 1 point for trading.

The third pattern is similar to the second one.

Imagine we have an order block in front of the market.

As the price approaches this level, it creates support, which retail traders put their stop loss under them.

Hence, there is a higher chance for the price to grab the liquidity under the equal lows and continue moving to the upside when it reaches the order block zone.

So let me show you some real chart examples to highlight the point.

Here we have EURUSD in a 1-hour time frame.

We can spot this valid order block that created inefficiency and break of structure, but looking at the left side, we can spot this support that rejected the price multiple times.

So there is a lot of liquidity gathered below this level.

Also we have gaps exactly under this zone and another valid order block.

So there is a high chance for the price to break below this liquidity zone, to fill the gap and continue pushing up when it taps into the second order block.

Here is another example.

You could have taken either of these candles as order blocks.

We have a clear gap, break of structure and a lot of liquidity gathered below these equal lows and this mitigated order block.

So once the price breaks below this higher low, some traders might take it as a change of character.

But looking to the left side, we can notice a clear gap and a valid order block exactly under this level.

So there is a higher chance that this move is going to be a liquidity grab and we are still identifying this market as bullish.

Now look at this bearish example.

Here in EURUSD 1 hour time frame we have an obvious downtrend.

We can spot this order block that created a clean inefficiency and break of structure.

But the interesting point about this order block is that the start of this move is a liquidity grab.

So this is plus one point trading opportunity.

But here is an important point.

Every time you encounter a losing trade, it does not necessarily mean that there was a certain error in your analysis.

Remember, no strategy always works because we can't control the market.

The second factor you should consider when trading order blocks is the market volatility and spread.

When we analyze the backtesting results, we notice that most winning trades happen on the highly volatile days and sessions.

Usually, on the first and last day of the trading week, the market suffers from low liquidity.

That is why the majority of winning trades happen in the mid-week.

Also, a pair like the EURUSD is best to trade during the highly volatile time of the day, such as London and New York sessions.

Otherwise, trading won't make sense because we will not witness the movements we want to see in the market.

Another important factor in trading order blocks is how to deal with the spread.

Many times, the market reacts to order blocks within a pip, so having a high spread on a pair will make you miss many winning trades or trigger the stop loss when the price did not even touch it.

The third factor influencing the success of order blocks is the market trend and their freshness.

Order blocks have a higher success rate in trending markets than in the ranging scenario.

So, as a result, it is better to trade the order blocks that are in the direction of the dominant market trend.

Also, trading recently printed order blocks are more accessible and more effective because the market constantly changes direction and spending too much time waiting for the price to tap into the order block often leads to a losing trade.

Since the demand and supply are constantly fighting to take control, trading fresh order blocks have higher win rates.

Here on the EURUSD when we have a clear trending market, see how often the market prints fresh order blocks, rejects them, and continues pushing up.

On the contrary, look at another example.

Here we have a valid order block zone.

But before price taps into this area, market have made a lot of demand zones and broke them to the downside.

Some traders might take these areas as liquidity grab and put their buying positions on the order block.

But the point is that the supply has taken control and trading this order block without confirmation won't be effective.

So that is why the confirmation in the lower time frames is the third factor you should Confirmations save us from a lot of unnecessary losses when the market decides to ignore the order blocks.

Also, having a solid entry reason as confirmation in our trading arsenal makes us trade more confidently.

The order blocks trading strategy is not limited to any time frames.

Still, after we spot the order blocks in the higher time frame, we zoom in two time frames lower to look for confirmations and trading entries.

So when we use 4 hour, 1 hour and 15 minutes chart as our higher time frame, we look for entry reasons in 15 minutes, 5 minutes and 1 minute, respectively.

You could use multiple price action setups as confirmations for trading the order blocks.

Here are some of the most common patterns we trade in the market.

In the first step, we wait for the market to mitigate our higher time frame order block and for price action to show its next move.

Now, the first thing we are waiting for to appear is a change of character.

A change of character signals that the short-term downtrend is over and the price can start to move to the upside.

So after the market makes a change of character, that is when we look to execute our trade.

Usually, we witness two common patterns and this is the way we place our orders.

The first pattern is when the change of character move creates inefficiency and a valid order block.

So, we place our order a spread size above the order block and put our stop loss a couple of pips below the lowest point of the zone.

We use a simple technique for taking profits to catch big risk-to-reward ratios without even experiencing much tension.

If we end up being right and the price starts pushing up, we will reposition our stop loss under the market structure every time market makes a new higher low.

This way, we could let our trades run in profits until we reach a higher timeframe supply zone and close the trade.

The second pattern happens when we have a change of character, but there is no inefficiency or gaps between the candles.

So we place our trade with 8 of retracement levels.

We put the retracement tool from the start of the change of character move to the end and place a buy order in the middle of the 6, 1, 8 and 7, 8, 6 retracement levels.

Our stop will be a couple of pips below the swing low and target the next level of structure in front of the price.

Remember that these trading setups are not limited to any timeframe or a pair.

Still, you must do your backtesting and see which pair is most suitable for these strategies.

So guys, if you have enjoyed this video, please give it a thumbs up to show your support and subscribe to our channel if you are new.

Thanks for watching and see you in the next episode.

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