Order blocks: footprints of big players

The idea: a big order can't be filled in one go

Imagine a fund wants to buy 2 million shares of a stock. If daily volume is 5 million, one huge order would push the price up quickly and the fund would make its own purchase more expensive. So big players fill orders piece by piece within a price zone. While they are buying, price often drifts sideways or slightly lower — someone is selling and they are quietly absorbing it. Once most of the order is filled, supply dries up and price leaves the zone with a strong impulse.

An order block (OB) is that zone's footprint on the chart: the last opposite candle before a strong move. A bullish OB is the last red candle before a strong up impulse.

Why does price come back to it? Two reasons:

1. Unfilled orders. Because the impulse was so fast, the big player may not have bought everything it planned to. If price returns to the zone, it becomes a buyer again.
2. Defending its position. A player who built a large position in the zone doesn't want price to fall below it.

This is a theory and can't be proven directly. In practice an OB is a more precise, rule-based version of the support idea. It gives a probability, not a guarantee.

What makes a valid OB

There are dozens of red candles on a chart every day. Which one is an OB? Three conditions:

1. Impulse. Strong, large-bodied candles after the OB — price "ran away" from the zone.
2. Imbalance (FVG). The impulse was so fast it left a fair value gap: a gap between candle 1's high and candle 3's low where no trading took place.
3. BOS. The impulse closed above the previous swing high (see the market structure lesson). An OB without a BOS is just a candle.

Extra quality signs: the zone is still untouched (fresh), it is in the direction of the bigger trend, and the impulse came on high volume.

All three conditions are on this chart. The last red candle is $48.6–49.9. Two large green candles follow it: between candle 1's (the OB's) high of $49.9 and candle 3's low of $50.8 an FVG of $49.9–50.8 remains. The impulse closed above the $52 high — a BOS. The impulse topped at $54.0.

Defining the zone

Zone boundaries

The standard method: the OB candle's high and low (including wicks). In the example, $48.6–49.9.

Some traders narrow the zone:

• Body only — open $49.5, close $48.9, i.e. $48.9–49.5.
• Midpoint (the "mean threshold") — half the zone: ($48.6 + $49.9) ÷ 2 = $49.25.

A narrower zone gives a better R:R but risks not getting filled. In the example the pullback reached $49.6. An order at the top of the zone ($49.9) was filled. An order at the top of the body ($49.5) or the midpoint ($49.25) would not have been — price never got there and went on to $54. Over-refining is a common way to miss trades.

Combining with Fibonacci and FVGs

The impulse runs from $48.6 to $54.0, a distance of $5.4. The Fibonacci levels:

• 61.8% — $54.0 − $3.34 = $50.66 — inside the FVG;
• 78.6% — $54.0 − $4.24 = $49.76 — inside the OB.