INTRODUCTION TO MARKET STRUCTURES

AND ORDER BLOCKS

By Alex Mwega
What we are covering in the session:

Market Structure

A. View in HTF

B. Views in LTF

Types of Order Blocks

A. Order Block

B. Fair Value Gap (FVG)

C. King OB

Common Liquidity and Trap zones marking

Entry Techniques

Market Psychology
Module 1: Market Structure

Market structure is simply support and resistance on your charts, swing highs, and lows. These are
levels on your chart attracts the most attention and mostly defines areas where traders will either take or
exit trades.

Two broad types of market structures:

1. Trending Market – also called expansion, distribution or impulsive

2. Ranging Market – also called consolidation,accumulation, contraction

Trending market are of two types:

 Bullish Market – This is where a market creates a series of Higher Highs (HH) and Higher Lows (HL).

 Bearish Market – This is where the market creates a series of Lower Lows (LL) and Lower Highs (LH)

Seeing as the charts are fractal in nature, whatever series is forming at the higher time frame, we expect the
same series to be unfolding within the lower time frames.
This is useful to us when it comes to entering a trade where the lower timeframe will usually start turning before
we can see the same effect on the higher timeframe.
We can also use our higher timeframe bias to zoom in to a lower timeframe for better entries and to take
advantage of trends early.
When there is a Break in Market Structure (BMS), expect market to go back to test then proceed in the new
direction. That is where you look for a trade, at the retest.
This is where you can apply Wyckoff Schematics to predict direction trade will take after the consolidation
The Market IP zones (reversal zones)

This module discusses reversal zones in the market aka Interest Point (IP). This is the area we are expecting
market to reverse from.

Markets move from one reversal zones to another. These are our interest points, these are areas where we want
to be taking our trade from.

There are three IPs that are of interest to us:

1. Order Blocks
2. Fair Value Gaps (FVG)/Liquidity Voids
3. King OB

ORDER BLOCKS

There are 2 types:

 Bullish Order Block

 Bearish Order Block

Bullish order block is the last bearish candle before expansion or bullish movement.

Bearish Order Block is the last bullish candle before expansion or distribution

Four Features of a good OB

1. It takes out liquidity i.e Liquidity Grab (LG)

2. It must be an impulsive market, we must see an impulsive movement away from that OB
3. It must break market structure (BMS)
4. It must be an engulfing candle

All don’t have to align for us to make use of it, we can actually get away with it if only 2 and 3 above are present.

FAIR VALUE GAP aka Liquidity Void

This is where the market was only one way i.e there were only buyers or only sellers in that particular zone. There
is potential for reversal in those zones.
KING OB

When this occurs usually it is a sign that in a lower time frame there is an order block on that area.
Common Liquidity and Trap zones marking

These are common areas where market is likely to turn also known as potential reverse zones. It is here that one
should likely look for an entry. Signal is stronger if there’s a confluence of 2 or more of these areas:

1. OB that took liquidity that is virgin

2. Inefficiency or Fair Value Gap

3. Yesterday High or Low

4. Weekly High or Low

5. Monthly High or Low

6. Yearly High or Low

7. Fibb OTE zones 61.8, 70.5, 79 or 88

8. Bounce of 50 or 200 or 800EMA

9. Quarter Point Theory

10. Swing Highs and Lows

11. Equal Highs and Lows

Type of Entry Patterns

There are three patterns Patterns:

1. Source Pattern
2. Breaker Pattern
3. Inverse/Mitigation Pattern

SOURCE PATTERN
BREAKER PATTERN

INVERSE PATTERN
Market Psychology

Proper psychology requires one to understand that we are involved in a seemingly random market. One cannot
be able to predict with certainty where the market will go, just like gambling in a casino.

However, we are exposed to a series of patterns that help us reduce the likelihood of the trade going in our favor
and this is what gives us the edge in trading.

To have proper Psychology in trading requires us to know that in order to enjoy such an edge, a series of trades
must be taken. One cannot therefore say that a particular trading strategy does not work unless they have
engaged in a series of trades then looked at their results. Science recommends 100 trades to fully proof the
concept. The other thing is one cannot tell the SEQUENCE of wins and losses, this is subject to the strategy’s win
ratio. If a strategy promises 75% win ration then over a series of 100 trades, one would expect 75 wins and 25
losses. Whether those losses are five in a row then a series of wins and as long as you ensure proper Risk Reward
ration, it means one will have won overall especially if the RR is good.

The 1% Risk Per Trade Theory

Proper risk management requires that we risk a maximum of 1% of our capital for a reward of 3% and above. This
means you can break even at a system that only wins 30% of the time. See below

At 100 Trades, assuming RR is 1:3 per trade with a 30% Win Ratio

Wins = 30 Trades X 3% per Win = 90%

Losses = 70 Trades X -1% per Loss = -70%

Here we still end up with 20% of our account after 100 Trades.

Also note that trading 1% of your account gives you 100 chances/trades. Only caveat is that you need to let
your profits run to target and NEVER ADJUST YOUR STOPLOSS ONCE IT IS SET. Any adjustment nullifies the
equation.
Now assuming a win rate of 70%

Wins = 70 Trades X 3% per Win = 210%

Losses = 30 Trades X -1% per Loss = -30%

You end up with 180% of your account.

Now with some proper entries and stop loss minimization once can get RR of 1:10 and above. Running the same
equation gives this:

Wins = 70 Trades X 10% per Win = 700%

Losses = 30 Trades X -1% per Loss = -30%

Now it is possible to get even 1:75RR and above but you get the picture. All this is a product of being consistent
and putting in the required chart time.

Remember the golden rule of the RR system:

 Let your profits run to targets (also have realistic targets as discussed)
 Never adjust your losses, only manage them by setting trade to BE or into profit once your trade has
moved in the market substantially to a point where it cannot return. You can move it to tested lows or
highs since it is unlikely that market will return there.

Your skills will improve with time and practice so be sure to invest in plenty of both:
The 3 stages in the development of your skill as a trader: