Order Blocks: An Introduction

An order block is the last opposing candle, or a small cluster of them, immediately before a strong impulsive move. The final down-candle before an aggressive rally is a bullish order block. The final up-candle before a sharp sell-off is a bearish one. The SMC narrative says large buyers accumulated there and left unfilled interest behind, so the zone should produce a reaction if price returns to it.

Marking a GBP/USD block, 1.2640 to 1.2662

Here is the mechanical version, which is the part you can actually apply. On the GBP/USD hourly chart, price drifts down and prints a bearish candle with a high of 1.2662 and a low of 1.2640. The next three candles rally hard, closing at 1.2681, 1.2714 and 1.2739, and the third one closes above the prior swing high at 1.2726.

That bearish candle is your candidate. The zone is 22 pips wide, from 1.2640 to 1.2662, and you would typically mark the body (1.2644 to 1.2658) as the tighter reference and the full range as the outer boundary. Invalidation sits just below 1.2640, because a close through the whole zone says the premise was wrong rather than early.

Now the risk arithmetic, which is why zone width is not a cosmetic choice. Entering at the top of the zone, 1.2662, with a stop at 1.2634 gives 28 pips of risk. Entering at the bottom, 1.2640, gives six pips of risk but requires price to trade 22 pips further before you are involved at all. The first fills more often and risks nearly five times as much. Neither is correct in the abstract, but you have to pick one in advance, because deciding while price is inside the zone means deciding under pressure.

There is a third option people rarely state explicitly: split it. Half the position at the near edge, half at the far edge, with one stop below the zone. The blended entry sits at 1.2651, the average risk is around 17 pips rather than 28, and you are involved even if price only tags the top of the zone and leaves. It costs you two commissions and a slightly worse fill on the half that fills first.

Three filters that thin the list

Every chart has dozens of candles that technically qualify. Three conditions cut the list to something workable.

• The departure is impulsive. Large-bodied candles leaving the zone, not a slow drift. In the example above, three consecutive closes carrying price 99 pips off the low of the zone. A gentle rally away suggests nothing meaningful happened there.
• The move breaks structure. The impulse takes out a prior swing point. A zone that produces a move which fails to break anything is a zone that mattered locally and nowhere else.
• The zone is fresh. Untested since it formed. Each revisit consumes whatever interest was sitting there, which is why the third tap of a level behaves so differently from the first.