Return to order blocks (RTO) is a trading strategy where the price returns to an order block zone to pick up pending orders placed by large institutions, which then initiate major market trends. It is also denoted by RTO.
In this trading strategy, we will also use smart money concepts such as stop-loss hunting and a break of market structure. These concepts will increase the success rate of order blocks in trading.
Kindly read the full post to the end and do not skip any important steps. Before I explain the RTO trading strategy, I will explain stop-loss hunting and the break of market structure so you will be able to understand the RTO strategy more easily.
What is stop-loss hunting (SH)?
In trading, the price always moves by stop-loss hunting because this provides enough liquidity for the big market players to drive major trends.
The market moves in the form of a broadening pattern, as shown in the image below. When the price breaks previous highs and lows, it is hunting the stop losses of retailers. Especially if there are two equal highs or two equal lows, the price breaks these important levels using a large wick. This is the phenomenon of stop-loss hunting.
I have also added some images of stop-loss hunting to make it easier to understand.
If you want to go into more detail, you should also learn about buy-stop liquidity (BSL) and sell-stop liquidity (SSL).
Break of Market Structure (BMS)
When the price breaks the previous swing high/low, a break of market structure forms.
After stop-loss hunting, the second most important concept to learn is the break of market structure. It helps us identify the trend in the market.
To identify the BMS accurately, first identify the last swing high and low. When the price breaks that swing high or low, a new BMS will form. You can also call it a break of structure (BOS).
For example, in the image below, the price is breaking the previous swing low consecutively, making a lower low trend. Each break represents the BMS, and it means the price is expected to go down further in the future.
In simple words, BMS helps us identify the market trend, and we should always trade in the direction of the trend.
How to identify order blocks correctly?
An order block zone forms when the market breaks a small price range and then makes an impulsive move. In simple words, we can also use the last opposite-colored candlestick before a series of bullish or bearish candlesticks to identify an order block zone.
Also, check the images below for a complete understanding of the working and formation of order blocks.
If you want to learn in detail, then read this article completely. In this post, I have just given an overview of the above patterns because I am explaining the RTO (return to order blocks) trading strategy.
Return to Order Blocks Strategy
The return to order block strategy is a combination of a break in market structure, stop-loss hunting, and order blocks.
I have explained this strategy in the steps below.
Step 1: Identify the break of market structure to determine the price trend on a higher time frame (HTF) or a trend reversal.
Step 2: After a BMS, find the phenomenon of stop-loss hunting on the chart.
Step 3: Identify the order block zone at the stop-loss hunting region, and wait for the price to return to this zone and then continue the trend in the direction of the BMS.
Let me explain with an example.
This is the CHFJPY candlestick chart. On the higher time frame, the price is in a bullish trend, making a BMS in the bullish direction. As we know, after a BMS, the price always retraces and moves slowly. It will mostly retrace to the Fibonacci 0.5 or 0.618 level. At those levels, we will switch to the lower or current trading time frame. Now, on the lower time frame, also highlight the BMS on the chart. As you can see in the image below, the price created a stop-loss hunting level. At this level, the price is also creating a bullish order block zone that aligns with the higher time frame trend.
Now, we will place a buy limit order at the zone’s high and wait for the price to return to this OB zone after making a bullish BMS.
Next, the price will fill the pending buy orders from the OB zone and then start a new long-term bullish trend, giving a very high risk-to-reward ratio.
You should also be more conscious when placing the stop-loss level because market makers can easily turn it into a large broadening pattern, creating another stop-loss hunting level. So, our stop loss should always be a few pips below the low or below the important Fibonacci levels.
I hope you will now be able to trade using the RTO strategy.
Conclusion
Return to order blocks is a proven trading strategy, and it actually works. You only need to apply it using the proper confluences. Without confluences, it will not work.
Also, remember that the higher time frame trend is the most important. We will always trade in the direction of the higher time frame.
First, determine the trend on the higher time frame and then trade small setups on a lower time frame in the direction of the higher time frame.
This is easy, but it will take some time to master multiple time frame analysis.
If you have any questions related to this trading strategy, then don’t forget to ask in the comments. I will try my best to answer your questions.
Thanks
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