ORDER BLOCK THEORY

Eng.Lutandula
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 Contents
What is an OB? .............................................................................................................................. 2
Types of Order Block ..................................................................................................................... 3
The Order of OBs ........................................................................................................................... 3
Categories of Order Block ............................................................................................................. 3
Bullish Source OB .......................................................................................................................... 4
Validation of a Bullish SOB .......................................................................................................... 5
Entry Techniques ........................................................................................................................... 5
Bullish Order Block (BUB) ........................................................................................................... 7
Bullish Breaker Block .................................................................................................................... 8
Bearish Source Order Block ......................................................................................................... 9
Validation of a Bearish SOB ......................................................................................................... 9
Entry Techniques ........................................................................................................................... 9
Bearish OB (BEB) ........................................................................................................................ 10
Bearish Breaker Block ................................................................................................................. 11
Order Block Implementation ...................................................................................................... 12
Before ......................................................................................................................................... 12
After ........................................................................................................................................... 12
Before ......................................................................................................................................... 13
After ........................................................................................................................................... 13
Before ......................................................................................................................................... 14
After ........................................................................................................................................... 14
Before ......................................................................................................................................... 15
After ........................................................................................................................................... 15
Terms and Abbreviations ............................................................................................................ 16

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 ORDER BLOCK THEORY

What is an OB?
Institutions trade using order blocks.
The Order Block is a specific price range or candle where institutions will be buying
or selling against the retail trend/dump money.
Institutions leave order blocks for themselves to trade at a later stage.
They will reverse the price to a previous order and then driving the price hard in the
direction of the trend (The real institutional trend).
These order blocks we can also call them specific levels of either going Long or
Short.
If an order block is violated or broken, it now qualifies as a Breaker, meaning Price
will retest back to that order block. Sometimes we call it a failed order block.
NB:
you don’t trade order blocks straight away, you wait for price to come back to that
order block then you take a trade.

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 Types of Order Block

Types of OBs:
i. Bullish Order Block (BUB)
ii. Bearish Order Block (BEB)

The Order of OBs

1. Source OB
2. Breaker OB
3. Continuation OB (Traditional/Basic OB)

Categories of Order Block

1. Strong Order Block
2. Rails Road Track
3. Multiple Break Block

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Bullish Source OB is the Lowest Candle or Price Bar with a Down Close that
has the most range between Open to Close and is near a “Support” level. The support
level can be YL, WL, ML, ADR Low…this is a Trend Reversal Order Block. It the
last candle creating a Peak Formation Low I.e. Lowest price point on the chart.
Hence a Bullish SOB indicates a shift in Market Structure from Bearish to Bullish.

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Validation of a Bullish SOB: When the High of the Lowest Down Close Candle
or Price Bar is traded through/surpassed by a later formed Candle or Price Bar.

Entry Techniques: When Price Trades Higher away from the Bullish Order
Block and then Returns to the Bullish Order Block Candle or Price Bar High – This
is Bullish i.e. you wait for price to Return to Order Block or Return to Origin (RTO)
then you enter. the aim is to take a trade from source to source.

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Defining Risk: The Low of the Bullish Order Block is the location of a relatively
safe Stop Loss placement. Just below the 50% of the Order Block total range is also
considered to be a good location to raise the Stop Loss after Price runs away from
the Bullish Order Block to reduce Risk when applicable.

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Bullish Order Block (BUB) - a Down Close candle in the most recent swing
high which has the most range between the open and close. This is an area where
institutions will be taking profits i.e. selling against the trend and new market makers
entering to resume the original bullish trend.
Specifically, a BUB is the previous Bearish candle to an upward movement. The
BUB is a series of bullish orders (purchases) made by institutional as the price was
falling (institutional buy when the market falls).

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Bullish Breaker Block is a bullish range or Up Close Candle in the most recent
Swing High prior to an Old Low being violated. The Sellers that sold this Low and
later see this same Swing High violated – will look to mitigate the loss. When Price
returns back to the Swing High – this is a Bullish Trade Setup worth considering.

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Bearish Source Order Block it is the Highest Candle or price bar with an Up-
close that has the most range between open to close and is near Resistance Level.
The resistance level can be YH, WH, MH, ADR High…this is a Trend Reversal
Order Block. It is the last candle creating Peak Formation High i.e. the Highest Price
Point on the chart. A bearish SOB indicates a Shift in Market Structure (SMS) from
being Bullish to Bearish.
Validation of a Bearish SOB: When the Low of the Highest Up Close Candle
or Price Bar is traded through/surpassed by a later formed Candle or Price Bar.
Entry Techniques: When Price Trades Lower away from the Bearish Order
Block and then Returns to the Bearish Order Block Candle or Price Bar High – This
is Bearish, wait for price to Return to the Bearish Source Order Block (RTO-Return
to Order Block/Origin) then you Enter. THE AIM IS TO TAKE A TRADE FROM
SOURCE TO SOURCE.
Defining Risk: The High of the Bearish Source Order Block is the location of a
relatively safe Stop Loss placement. Just above the 50% of the Order Block total
range is also considered to be a good location to raise the Stop Loss after Price runs
away from the Bearish Order Block to reduce Risk when applicable.

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Bearish OB (BEB) is a Bullish Range or Up-Close Candle in the most recent
Swing Low which has the most range between open and close.
Specifically, a BEB is a Bullish or a series of Bullish candles after a bearish
movement, it is the last bullish candle in a down trend.
The BEB is a series of bearish orders (sells) made by institutions as the price was
going up (institutional sell when the market rises).

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Bearish Breaker Block is a bearish range or Down Close Candle in the most
recent Swing Low prior to an Old High being violated. The Buyers that buy this Low
and later see this same Swing Low violated – will look to mitigate the loss. When
Price returns back to the Swing Low – this is a Bearish Trade Setup worth
considering.

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 Order Block Implementation

Before

After

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Before

After

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 Before

After

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Before

After

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 Terms and Abbreviations
1. accumulation — smart money buying at, or near, a swing low, in order to (1) enter long
positions, or (2) cover short positions (i.e., smart money “buying low”)

2. AD (or A/D) — accumulation and/or distribution

3. ADR — (see average daily range)

4. A-KZ — (see Asian Kill Zone)

5. anticipatory trade analysis phase — top-down analysis, phase 2: seasonal

tendencies, SMT divergences (yields, USDX, etc.), COT report, and key S/R levels

6. Asian Kill Zone — nominally 8am-12pm Tokyo time (this time period may be expanded
at the discretion of the trader); this is one of 4 kill zones

7. Asian range — this term may refer to (1) the 9am-2pm Tokyo time period, (2) the H-
L price range within that period, or (3) price action within that H-L range

8. Asian session — 9am-7pm Tokyo time (a low-volume trading session, typically

characterized by price consolidation within a restricted range)

9. ATR — (see average true range)

10. AU — AUD/USD pair

11. Aussie — nickname of the AUD/USD pair

12. average daily range (ADR) — the average of the most recent daily H-L ranges;
typically, the last 5 daily H-L ranges are averaged to yield the ADR for day 6

13. average true range (ATR) — daily ATR is similar to average daily range (ADR), except
that ATR accounts for price gaps (e.g., Sunday gaps), but ADR does not
14. banks (or “big banks”) — top-tier investment banks I[/I] in the interbank
network, engaged in high-volume currency trading — see list on page 5

15. bazooka (or ICT bazooka) — Michael sometimes refers to a standard type 2 oscillator
divergence as a “bazooka”, to contrast it with the more powerful stinger

16. BE — (see break-even)

17. bear flag — a fairly tight, fairly short-duration consolidation pattern formed at the bottom
of a sharp down-move, marking a pause in the down-move

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 18. bias — (see directional bias)

19. big figure — (see figure)

20. Bill Wolfe — originator of the 5-point wave concept called Wolfe Waves

21. break-even — the price at which closing a position (either manually, or by being
stopped-out) results in zero profit and zero loss

22. BST — British Summer Time (BST=GMT+1), the time zone in the U.K. and Ireland
between March and October — see London time

23. bull flag — a fairly tight, fairly short-duration consolidation pattern formed at the top of a
sharp up-move, marking a pause in the up-move

24. Bunds — German government debt instruments; e.g., 2-year Bund, 5-year Bund, 10-year
Bund, 30-year Bund

25. buy program — a trending market profile in which the directional bias is up (bullish),
and trades in the direction of the trend are long (buys)

26. buy zone — given either (1) a HTF bullish bias, or (2) a ranging market, a buy zone is the
price range below the pivot I[/I], or below the TT fair-value zone
27. cable — one of the nicknames of the GBP/USD pair

28. caddie — one of the nicknames of the USD/CAD pair

29. central bank — the entity responsible for overseeing the monetary system of a nation, or
group of nations — see list on page 5

30. CFTC — (see Commodity Futures Trading Commission)

31. Chris Lori — athlete, fund manager, forex trader, and teacher/mentor — often mentioned
positively by Michael

32. City of London (or The City, or The Square Mile) — the financial district in London

33. classic Asian session buy signal — a signal to go long after (1) a late NY session price
decline, and (2) an Asian session price bounce off a key support level

34. classic Asian session sell signal — a signal to go short after (1) a late NY session price
rise, and (2) an Asian session price bounce off a key resistance level

35. coil expansion pattern — a consolidation pattern (the coil) which is followed by a break-
out (the expansion) whose extent depends on the dimensions of the coil

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 36. commercials — large futures and options hedgers whose position sizes require reporting
to the CFTC; their net (aggregate) position appears in the COT report

37. Commitment of Traders (report) — weekly CFTC report on positions held by 3 classes
of traders in individual futures and options contracts (including currencies)

38. Commodity Futures Trading Commission — U.S. regulator of commodity futures and
spot forex; the CFTC compiles and publishes the COT report

39. Commodity Research Bureau Index (CRB Index)— an index of 19 commodities

(agricultural, metals, oil & gas); it is used as one element of inter-market analysis

40. confluence — occurrence of two or more significant technical levels (e.g., a pivot level
and an OTE) at the same (or nearly the same) price on a chart

41. consolidation — a time period (consolidation period) in which price moves in a narrow
range (consolidation range), typically bounded by short-term S/R levels

42. correlated pairs — two currency pairs whose prices move roughly in tandem (example:
EUR/USD and GBP/USD; another example: AUD/USD and NZD/USD)

43. correlated pair SMT — (see the list of Smart Money Tools on page 5)

44. COT (or COT report) — (see Commitment of Traders report)

45. CRB Index — (see Commodity Research Bureau Index)

46. day trade (or intraday trade) — a trade in which the entry and exit are expected to
occur within the same trading day, and the profit target is 30-100 pips

47. DD — (see drawdown)

48. demo — a practice platform, practice account, or practice trade, etc.

49. directional bias — current direction of price movement (as determined on HTF’s),
deemed to be the tradable trend (see buy program, and sell program)

50. distribution — smart money selling at, or near, a swing high, in order to (1) enter short
positions, or (2) liquidate long positions, (i.e., smart money “selling high”)

51. doji — a candlestick having a very small real body (or no real body), with upper and/or
lower wicks of any length; it often indicates a swing high or swing low

52. dollar — proper name of the U.S., Canadian, Australian and New Zealand currencies,
often abbreviated $, C$, A$ and NZ$, respectively

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 53. double-tap — given an OTE retracement from a SH (or SL), a double-tap involves
taking 1st profit at the SH (or SL), and 2nd profit at a higher profit-target

54. double zeros (00’s) — (see figure)

55. drawdown — a measure of account depletion due to accumulated losses

56. dumb money — (see street money)

57. EDT — Eastern Daylight Time (EDT=GMT-4), the time zone in the eastern U.S. and
Canada between March and November — see New York time

58. EG — EUR/GBP pair

59. EJ — EUR/JPY pair

60. EMA — (see exponential moving average)

61. equity management — (see risk management)

62. EPA — estimated price at arrival; in a classic Wolfe Wave set-up, the price-point at the
intersection of the EPA line and a vertical line drawn from the ETA

63. EPA line — in a classic 5-point Wolfe Wave set-up, the EPA line is a line drawn
through points 1 and 4, and projected to the right; the EPA lies on this line

64. EST — Eastern Standard Time (EST=GMT-5), the time zone in the eastern U.S. and
Canada between November and March — see New York time

65. ET — Eastern Time in the U.S. and Canada (New York time) — ET is either EST or EDT,
depending on time of year

66. ETA — estimated time of arrival; in a classic 5-point Wolfe Wave set-up, the time (on a
chart) indicated by the intersection of line 1-3 and line 2-4

67. ETA line — in a classic 5-point Wolfe Wave set-up, the ETA line is a line drawn
through points 1 and 3, and projected to the right; the ETA lies on this line

68. EU — EUR/USD pair

69. euro — proper name of the European Union single currency, symbol €; also, one of the
nicknames of the EUR/USD pair

70. exponential moving average — a moving average of data from n-number of periods,
weighted exponentially to give greater weight to more recent data

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 71. fair value — the median price in a previous H-L price range (e.g., a previous Daily price
range, or a Trader’s Trinity price range); see no-man’s land

72. fib — shorthand for Fibonacci tool, or Fibonacci level; (note: in common usage,
Fibonacci is sometimes capitalized)

73. Fibonacci expansion — the use of a Fibonacci tool (in the opposite direction to a fib
retracement measurement) in order to establish swing projection price targets

74. Fibonacci extension — continuation of a Fibonacci retracement scale, beyond the 100%
retracement level, typically to 127.2%, 161.8%, 200%, etc.

75. Fibonacci retracement — a scale for measuring retracements as percentages of a price

range, typically 0%, 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100%

76. Fibonacci tool — a price-measuring tool which divides a price range into percentages
(see Fibonacci retracement, Fibonacci extension, and Fibonacci expansion)

77. fiber — one of the nicknames of the EUR/USD pair

78. fig — shorthand for figure

79. figure — price of the form x.xx00 (or xxx.00 in the case of yen pairs) — also called fig,
big figure, full figure, and double zeros (00’s); compare to handle

80. fractal — (def.1) one of the many price patterns which repeat themselves in all markets,
on all time frames from 1-minute (or lower) to 1-Month (or higher)

81. fractal — (def.2) a pattern of 5 consecutive candles, in which the centre candle has the
highest high of the 5 candles, or the lowest low of the 5 candles

82. fractal high — in a 5-candle fractal pattern, if the centre candle has the highest high of
the 5 candles, then that high is a fractal high

83. fractal low — in a 5-candle fractal pattern, if the centre candle has the lowest low of the
5 candles, then that low is a fractal low

84. franc — proper (French language) name of the Swiss currency, symbol Fr, SFr or ₣
(German language name - frank; Italian language name - Franco)

85. full figure — (see figure)

86. fundamental analysis — analysis of macro-economic factors (interest rates, inflation,

GDP, unemployment, etc.) which influence long-term currency trends

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 87. general market analysis phase — top-down analysis, phase 1: analysis of interest
rates, USDX, Treasuries, stock indices, CRB Index, and gold and oil

88. Gilts — British government debt instruments; e.g., 2-year Gilt, 5-year Gilt, 10-year Gilt,
30-year Gilt

89. GJ — GBP/JPY pair

90. GLGT — “Good Luck and Good Trading”, the signature used by Michael (and others)

91. GMT — Greenwich Mean Time - the time of day at the Prime Meridian (defined as
longitude 0°) in Greenwich England; also, the basis for a world system of 24 hourly time-
zones, designated by GMT offsets (GMT-1, GMT+1, GMT+5½, etc.). See UTC.

92. GMT pivots — see London pivots

93. GU — GBP/USD pair

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