Most traders waste a lot of time trading order blocks that never work.
I see it all the time: charts covered in boxes, indicators stacked on top of each other, and trades that still get stopped out.
The issue isn’t the order blocks themselves. The issue is that most retail traders don’t know how to filter them or place them correctly within the market structure.
In this post, I’m going to break down what an order block actually is and the three simple rules I use for order block trading. This is based on price action, not indicators, and it’s how I personally identify order blocks that actually matter.
What an Order Block Actually Is
An order block represents an area on the chart where institutional traders placed significant buy or sell orders that caused strong price movements.
These areas often appear right before an aggressive upward or downward move.
More specifically, an order block is the last opposing candle before the price breaks away with intent. That candle shows where large traders entered the market with size.
It’s how Smart Money spots institutional buying and selling.
In a bullish order block, it’s the last bearish candle before a strong move higher. In a bearish order block, it’s the last bullish candle before a sharp move lower.
These price zones can act as future support or resistance when price retraces back into them, but not every order block is worth trading.
In fact, most are a complete waste of time and money.
Why Not Every Order Block Works
If you start to identify order blocks on a chart, you’ll find a lot of them. Even in liquid markets like forex, you might see several order blocks form during a single session.
This is where many traders get into trouble. They treat every order block as a guaranteed support or resistance level.
But not every order block represents real institutional interest. Most are just noise created during consolidation zones or low-volume market conditions.
That’s why filtering order blocks using market structure and price confirmation is so important.
These three candles meet the textbook definition, so why did they fail?
They failed because they didn’t follow these rules:
Rule #1: The Order Block Must Align With Market Structure
For me, this rule is non-negotiable. A valid order block must form within the same price leg as a Break of Structure (BoS) or Change of Character (CHoCH).
The best order blocks will occur at the base of these moves.
A break of structure only matters if internal liquidity is taken first. Without that liquidity sweep, the move is usually internal and lacks institutional activity.
When an order block forms during a true market structure shift, it often represents areas where institutional buyers or sellers stepped in with large positions.
That information is pure gold. If we know where large buyers or sellers stepped in before, odds are those areas will be defended in the future.
Rule #2: Look for Displacement and Strong Price Movements
After identifying the order block, I want to see displacement. This tells me that the price moved with urgency and intent.
Displacement often shows up as a Fair Value Gap (FVG) or a candle that moves quickly away from the consolidation zone with increased volume.
That kind of movement tells me the market didn’t have time to fully fill all orders. This is where institutional activity leaves a footprint.
If price drifts away slowly or chops sideways, I’m not interested. Strong price movements matter.
Rule #3: The Order Block Must Be Unmitigated
This rule alone eliminates most bad setups. An order block is only valid the first time price reaches it.
Once the price touches the zone, the orders that caused the move are often filled. At that point, the edge is gone.
If price has already wicked into the order block, even slightly, I consider it mitigated. From an order block trading standpoint, that level is done.
Price might still bounce or form other trading concepts like a rejection block or breaker block, but it’s no longer a clean order block setup.
External vs Internal Order Blocks
Order blocks can form in various conditions, and understanding the difference matters.
External order blocks form at major highs or lows and often align with key levels, resistance zones, or demand zones.
The problem is that in strong trends, the price may never retrace deep enough to reach these external price areas.
Internal order blocks form within a trend and are tested more often. I’ve found these work especially well when price retraces during a bullish or bearish trend.
Internal Order Blocks and Pullbacks
Internal order blocks often line up with pullbacks and natural market pauses.
These areas frequently overlap with other trading concepts, such as support and resistance, supply and demand zones, and prior price areas.
When an internal order block aligns with a pullback and shows price confirmation, it can offer a clean entry with defined risk.
Notice that the internal order block below developed after a period of consolidation. However, it satisfies our rules and, therefore, marks an area that large buyers will likely defend.
It’s also within the Optimal Trade Entry (OTE) band, measured from the external low to the external high.
This is my preferred buy setup, as it meets my rules and aligns with OTE.
When an Order Block Is Invalid
Sometimes everything looks good at first. You have structure, trend, and displacement.
But one detail can invalidate the setup.
If the price has already wicked into the order block, it’s mitigated. At that point, it no longer represents unfilled significant orders.
Price might still react or form support and resistance levels, but from an order block perspective, the trade is off the table.
Another instance that invalidates a setup is a move that lacks intent. I measure intent with a BoS or CHoCH. If one of those two isn’t present, I don’t take the trade.
Key Takeaway
Order blocks aren’t magic. They are just one piece of technical analysis in your SMC toolbox.
They work best when combined with market direction, price confirmation, and an understanding of institutional activity.
Focus on structure first. Look for strong displacement and trade only unmitigated order blocks.
Do that, and you’ll stop forcing trades and start focusing on price zones that actually make sense.
Frequently Asked Questions
Are order blocks the same as supply and demand zones?
They’re related, but not the same. Supply and demand zones are often broader areas, while order blocks are more precise and tied to specific institutional orders.
Do I need order blocks to trade SMC?
No. You should only use them if they add value to your SMC strategy. Often, paying attention to FVGs will offer similar insights.
Can order blocks be used with other trading strategies?
Yes. Order blocks work well alongside other trading strategies and concepts like liquidity sweeps, support and resistance, and trend analysis.
How do I manage exits when trading order blocks?
I usually define exit points ahead of time using nearby resistance zones, prior highs or lows, or clear take profit levels.
Do order blocks work in all market conditions?
They work best in trending or expanding market conditions. In choppy or low-volume environments, many order blocks fail.
