Order Blocks and Breaker Blocks: A PrimeX Capital's Guide

Order blocks and breaker blocks are essential concepts in price action trading. They help identify zones of significant institutional activity, offering clues about potential market direction. While popular in forex, these techniques are applicable across various financial markets.

Order blocks are specific price areas where large financial institutions, like banks and hedge funds, have placed substantial orders. These zones act as powerful support and resistance levels.

• Bullish Order Block (Demand Zone): This is the last bearish candle before a strong upward price move. It signifies a concentration of institutional buying pressure.
• Bearish Order Block (Supply Zone): This is the last bullish candle before a sharp downward price move. It indicates a high level of institutional selling.

Why They Work: When the price returns to an order block, it often triggers a reaction because of the unfulfilled orders remaining in that zone.

How to Identify and Use Order Blocks

• Look for a Strong Move: An order block is validated by a powerful, impulsive move away from it.
• Find the Last Opposite Candle: Identify the last candle that moved against the direction of the strong move. This is your order block.
• Use Higher Timeframes: Order blocks on 4-hour, daily, or weekly charts are more reliable and carry greater weight.

Trading Strategy:

• Entry Signal: Look to enter a long (buy) position when the price retraces to a bullish order block and shows signs of rejection. Conversely, enter a short (sell) position when the price hits a bearish order block and gets rejected.
• Confirmation: Always use other tools, such as the Relative Strength Index (RSI) or moving averages, to confirm your trade.

What Are Breaker Blocks？

A breaker block is created when a traditional order block fails to hold the price and is violated. This failure signals a significant shift in market sentiment and momentum.

• Bullish Breaker Block: Forms when a bearish order block (supply zone) is broken by a strong upward move.
• Bearish Breaker Block: Forms when a bullish order block (demand zone) is broken by a strong downward move.

How to Trade Breaker Blocks

After an order block is broken, it often transforms into its opposite. The broken supply zone becomes a new demand zone, and the broken demand zone becomes a new supply zone.

Trading Strategy:

• Entry Signal: After a breaker block is formed, wait for the price to retrace to the original (now broken) order block zone. This retest offers a high-probability entry point in the direction of the breakout.
• Example: If a bearish order block is broken to the upside, a trader would wait for the price to dip back to this level before entering a long position, anticipating a bounce.

Key Considerations for Success

• Liquidity Voids: Combine these concepts with the identification of liquidity voids (or Fair Value Gaps)—areas where the price moved quickly, leaving inefficiencies that the market often seeks to fill.
• Risk Management: Never trade without a clear stop-loss. Place it just beyond the order or breaker block zone to protect your capital.
• Not a Standalone System: Order blocks and breaker blocks are most effective when used as part of a comprehensive trading plan that includes other forms of analysis.

By mastering these concepts, you can better understand institutional order flow and improve your ability to identify high-probability trading setups.