How to identify high probability Order Blocks in Trading?

The smart money concepts such as break of structure, sell-side liquidity, buy-side liquidity, and change of character help to identify high-probability order blocks in trading. Order blocks represent chunks of orders placed by institutional traders.

In this post, I will show you how we can use smart money concepts to find only the highest winning order blocks. The market is always full of noise, and it’s difficult to become a profitable trader by trading only order block zones. We need to add confluences so we can filter out the best order blocks. This will significantly improve the winning ratio.

So, read the full post without skipping any steps.

How to Find Order Blocks Correctly?

In technical analysis, an order block is a combination of a price range and an impulsive price wave. First, the market creates a ranging price structure, then it breaks that structure and moves in the form of an impulsive wave, showing the presence of institutional orders.

However, we can make things simpler by using the following technique:
For example, if after a base or bearish candlestick, five consecutive bullish candlesticks form in a row, then a bullish order block will form. While if after a bullish candlestick, five bearish candlesticks form in a row, then a bearish order block will form.

We can also simplify things by identifying order blocks on the candlestick chart. However, if you want to become an advanced trader, you should always try to understand the market structure, such as price range and impulsive waves.

What is Break of Structure and Change of Character?

Break of structure and change of character are two smart money concepts. By using these terms, we can identify trends and trend reversals in the market.

1. Break of Structure (BOS)

On the candlestick chart, when the price breaks a higher high and also makes a higher low, a break of structure happens in a bullish direction, meaning the price is in an uptrend.
On the other hand, when the price breaks a lower low and also makes a lower high, a break of structure happens in a bearish direction, showing that the market is in a downtrend.

2. Change of Character (Choch)

Change of character represents the market shift in the form of a trend reversal. If the price is in a bullish trend and at a resistance level, the price makes a lower low, breaking the previous higher low, and then makes a lower high, a trend reversal occurs. We also call this trend reversal a change of character. It means market sentiment has shifted from bullish to bearish.

Both Choch and BOS are simple concepts but powerful enough to help us create a profitable trading strategy.

Now, let me show you how to combine these three concepts.

Confluence of BOS and Choch for Order Block Zones

Actually, not every order block zone that forms on the candlestick chart is tradeable. We will experience many losses if we trade each order block zone. The market is full of fake zones, and the big institutions try their best to trap retail traders in these fake zones.

That’s why adding confluences will increase the probability of finding winning order block zones. Also, BOS only tells us about the trend, and it’s best to trade only when there is a trend in the market and stay away when there is a sideways or ranging market structure.

So, the strategy here is that we will only trade order blocks that form during a BOS pattern or we will only trade when there is a change of character in the market.

For example, if there are continuously bullish BOS patterns forming, then we will trade only bullish order blocks. And when a Choch pattern forms that changes the trend from bullish to bearish, then we will trade only bearish order blocks after this situation.

This will also keep you away from overtrading, and you will only trade during trending market conditions. This will significantly improve your order block trading strategy.

Now, let me explain a complete order block trading strategy with the confluence of BOS and Choch.

Order Block Trading Strategy with BOS and Choch

In this trading strategy, I will first use the confluence of BOS for identifying high-probability OBs. Then, I will use the confluence of Choch with OBs. The combination of BOS and OB is a conservative and perfect trend trading strategy.

BOS and Order blocks Strategy

1. First, identify the two break of structures and the formation of higher lows.
2. Now, identify the order block in the direction of the break of structure. If there are bullish BOSs, find only bullish order blocks. However, if there are bearish BOSs, find only bearish order blocks.
3. Place pending orders at the order block zones. When the price retraces after breaking the second BOS, it will most probably jump from the order block zone.
4. You can also wait for any price action pattern at the order block zone, but that will be a more conservative setup, and it is totally optional.
5. For take profit, you can close at the next BOS or wait for the formation of a Choch pattern in the market.

This is the best order block trend trading strategy.

Choch and Order blocks Strategy

1. First, identify the change of character pattern on the candlestick chart.
2. If the trend changes from bullish to bearish, then find a bearish order block. If the trend changes from bearish to bullish, then identify a bullish order block.
3. You should trade the order block on the price retracement after Choch formation.
4. Take profit should be at the next BOS formation.

Now, remember that you can also change the timeframes to find the order blocks after Choch formation. For example, if you are on a 15-minute timeframe, you can switch to a 10 or 20-minute timeframe to find an order block and avoid missing a valid order block setup.

Next, another important thing to consider is to add the confluence of sell-side liquidity and buy-side liquidity on higher timeframes.

Higher Timeframe SSL and BSL Confluence

A higher timeframe SSL and BSL can help us find the best area and direction to trade in the market.

The rule is simple. If there is buy stop or sell stop liquidity at the higher timeframe, then you can apply the above BOS, Choch, and OB trading strategy. At this position, you will get high-probability order blocks.

You can also redlist the currency pairs or financial assets that are at BSL or SSL levels, so later you can trade them on lower timeframes by applying the above order block trading strategy.

If you don’t know about BSL and SSL, then kindly read this article.

The Bottom Line

I hope you will like this order block trading strategy because it consists of smart money concepts. It contains rules that are logical and work in the real market.

However, I highly recommend you spend some time backtesting this strategy so you can master it. There is much more that I cannot explain in words, but you will learn it only after backtesting and live trading.

If you have any questions, don’t forget to comment below. I will try my best to answer you.

Thanks!