If you have ever struggled with picking the right order blocks for your trades, this video will walk you through the process and ensure you never make that mistake again. In this guide, we’ll cover the three biggest mistakes traders often make, followed by five principles I use to successfully select my order blocks. Pay attention to these insights, as they can significantly improve your trading strategy.
3 Largest Errors Traders Commit When Picking Order Blocks
1. Choosing Order Blocks With No Liquidity
The most common error made by traders is to choose an order block that doesn’t capture or touch any liquidity. Let me explain it this way: if you are in a downtrend, which is making lower lows and lower highs, you need to pick an order block that has already consumed an area of liquidity or, at the very least, has liquidity present nearby.
For example, a trading range with price breaking down and forming an order block may be the order block itself if that order block hasn’t taken out liquidity (such as running highs). In other words, if there is no liquidity to target, it’s likely that your orders are going to get swept up.
Instead, a tapped-liquidity order block has already cleared some stops and is hence ready for more movement. Such a setup boosts the possibility of a successful trade. The order block might be the one about to tap into a liquidity pool before continuing in the direction of the trend.
2. Selecting Order Blocks That No Longer Apply
The order blocks that the traders frequently make incorrect use of are the ones that are no longer indicative of the current price action. For example, if price breaks structure and then forms an order block, and then price changes the direction of the trend (let’s say from being bearish to being bullish), then that is no longer in alignment with the current trend and is no longer pertinent.
Always make sure the order block you are selecting still makes sense with regards to the current market structure when trading. For instance, if you are on a bearish trend and prices are making higher highs, your previous order blocks do not make sense in the short position anymore because the trend has changed to bullish. Be certain of moving into the trade at the change of trend.
3. Random Order Blocks Selection
Lastly, many traders select random order blocks that have no real significance. Just because an order block looks nice doesn’t mean it’s worth trading. A common mistake is to find a “buy to sell” candle or “sell to buy” candle and assume that it will be the right order block for the trade. This approach is more or less unlikely to be correct, since by definition the order block chosen does not mean anything or have a specific impact on price.
The bottom line is that order blocks need to make a lot of movement in the market — they should have altered the course of price action or broken through significant levels. Trading random order blocks based on the way they look will surely result in losses.
The Five Principles for Selecting Successful Order Blocks
Now that we’ve identified the errors, let’s dive into the five principles I use to select successful order blocks.
1. Liquidity Is a Must
Order blocks must either take liquidity or have liquidity to take. Without liquidity, the market doesn’t have an incentive to move. When selecting an order block, look for one that has already taken liquidity (such as clearing previous highs or lows), or one that is set up to take liquidity before pushing price further in your direction.
For example, if price is in a downtrend and breaks structure, look for order blocks that have already taken liquidity (like liquidating highs) or have liquidity to target (such as an equal low below).
2. It Must Break Something Significant
Order blocks are only selected if they have caused structural change within the market. This means that the order block has contributed to breaking the market structure, including where a swing high or low is taken out. It is not about finding an order block but about finding the one that has changed the nature of price action.
For instance, if price is printing lower lows and lower highs, then search for the order block in the last leg that broke structure. That way, you’re trading order blocks in the context of the trend and the momentum of the market.
3. It Must Be at the Right Location
For any given order block to be effective, it needs to be in the right location within the current market structure. This means being near key areas of support or resistance or even having already caused a shift in price action. If an order block is too far from the current price or is just located without context, it’s unlikely that it will work.
Consider where the order block fits in the larger context of the market’s trend and structure.
4. It Must Be Relevant to Current Price Action
Order blocks need to be relevant to the current price action. If a trend has shifted, or if the market structure has changed, any order block that existed prior to the shift becomes irrelevant. Be sure to focus on order blocks that align with the direction of the market at the time of the trade.
5. It Must Have Proven Strength
An order block must have proven its strength by causing a meaningful price move. This means the price action following the order block must be significant enough to break key levels or cause a shift in structure. Don’t waste time on order blocks that haven’t proven their ability to move the market.
Conclusion
By avoiding these three major mistakes and applying the five principles for selecting successful order blocks, you’ll significantly improve your trading strategy and have a better understanding of how the market moves. Remember, liquidity, structure, and context are your best friends when choosing order blocks. Stick to these rules, and you’ll be on your way to becoming a more successful trader.
