Smart Money Concepts Order Blocks (1/6)

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How they form

Smart Money Order Blocks (SMOBs) are formed when a large institutional order is executed in the market at a specific price level. These large orders are typically placed by big players such as banks, hedge funds, and other financial institutions who have access to significant amounts of capital and trade on behalf of their clients or themselves. When these institutional orders are executed, they create a significant liquidity imbalance at the specific price level, causing a sudden price movement. This liquidity imbalance occurs because the size of the institutional order is much larger than the volume of trades happening in the market at that time. For example, when Lehman Brothers filed for bankruptcy, it caused a significant shock to the financial markets, leading to a sudden increase in selling pressure. Institutional investors such as hedge funds and banks had significant holdings in Lehman Brothers, and as a result, they needed to sell their positions quickly to limit their losses. When these institutional investors placed large sell orders for Lehman Brothers' shares, it created a significant liquidity imbalance in the market, causing a sudden price movement. The size of these institutional orders was much larger than the volume of trades happening in the market at that time, which led to a liquidity imbalance. As a result, the price of Lehman Brothers' shares dropped sharply, creating a SMOB at the specific price level where the institutional orders were executed. A SMOB that forms at a key level of support can indicate that buyers are stepping in, and the price is likely to move higher. Conversely, a SMOB that forms at a key level of resistance can indicate that sellers are stepping in, and the price is likely to move lower.

How to Identify Order Blocks

First, look at where the market is consolidating, creating an area of volume price is likely to be attracted to. In the example below, you can see how order blocks are formed right after a consolidating market. Due to this it differentiates from support/resistance zones.

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After first checking this first, the indicator will plot either a red bearish order block or a blue bullish order block.

How to trade

Firstly the longer an order block has been plotted the weaker that it becomes, in adddition the more retests the order block gets, the weaker it becomes. Due to those factors in order for us to trade using order blocks look for where an order block has been formed recently. Buy when the candle that hit the order block closes and set your stop loss under that order block to prevent a failed block. The example below illustrates this.

Highlighted in white (Area of consolidation, first candle that closes (happens to be the first green in the red box) then enter the short, no retests and it is a brand new order block. Set stop loss above orderblock)

Other concluding remarks

1. Order blocks can be found on any time frame: Order blocks can be found on any time frame, from a one-minute chart to a monthly chart. However, the larger the time frame, the more significant the order block is likely to be.
2. Order blocks can be subjective: Identifying order blocks can be subjective since it relies on visual analysis and interpretation of price action. Therefore, it is important to use other technical indicators and analysis techniques to confirm your trading decisions.
3. Order blocks can provide a strong level of support or resistance: Once an order block is formed, it can provide a strong level of support or resistance. This means that the price is likely to bounce off the order block level, making it an important level to watch for potential trading opportunities.
4. Order blocks can be used with other trading strategies: Order blocks can be used in conjunction with other trading strategies, such as trend analysis or Fibonacci retracements. Combining multiple strategies can increase the likelihood of successful trading opportunities.
5. Order blocks can be used for both short-term and long-term trading: Order blocks can be used for both short-term and long-term trading strategies. Short-term traders may use order blocks to identify potential entry and exit points, while long-term traders may use order blocks to identify significant levels of support or resistance for holding positions over a longer period.

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