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ICT Order Block Explained: Complete Trading

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January 17, 2025
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SELLSIDELIQUIDITY

An Order Block is a concept used to describe a key price level where large institutional traders
(often referred to as “smart money”) have placed significant buy or sell orders. These orders
create a block or zone on the price chart, and when the price revisits this level, it often results in a
strong reaction. Traders use Order Blocks to identify potential areas of support or resistance,
where price movements are more likely to change direction.

Table of Contents

What Is An Order Block?

Michael J. Huddleston, also known as ICT (Inner Circle Trader), defines an Order Block (OB) as the
last down-closing candle before a significant upward price move or the last up-closing candle
before a significant downward price move. These zones act as price magnets, often drawing the
price back to these levels to execute pending orders.

What Is The Psychology Behind Institutional Order Blocks?

Institutional investors, or “smart money,” place large orders at specific price points or key levels.
Due to the substantial volume of these orders—often worth millions of dollars—they cannot be
executed all at once. As a result, the price is often pushed back to these levels, enabling the
completion of these pending orders.

How To Find ICT OB

To find an Order Block, follow these steps:

1. Identify Key Levels:

Start by locating strong support and resistance levels on higher timeframes. These levels act
as price magnets due to the clustering of stop-loss orders and institutional interest.
2. Analyze Price Action:
Observe how the price behaves as it approaches these key levels. Look for signs of liquidity
sweeps—a deliberate move by smart money to capture stop-loss orders placed by retail
traders.
3. Mark Relevant Candles:
After a liquidity sweep, identify and mark the last down-closing candle before an upward move
or the last up-closing candle before a downward move. These candles represent the Order
Blocks.

What Is A Bearish Order Block?

A Bearish Order Block (ICT Bearish OB) refers to the last up-closing candle(s) that precede a
significant downward market movement. These candles signify areas where smart money has
placed large sell orders.

However, it is important to note that not every up-closing candle qualifies as a Bearish Order
Block. For a candle or a set of candles to act as a Bearish Order Block, they must form immediately
after a sweep of buy-side liquidity.

Key Characteristics Of A Bearish Order Block:

1. Liquidity Sweep:
The Bearish Order Block forms after the price sweeps liquidity above a key resistance level,
triggering stop-loss orders and enticing buyers into the market.
2. Market Structure Break (MSB):
A break in market structure in the opposite direction of the liquidity sweep (downward)
strengthens the validity of the Bearish Order Block.
3. Candle Body and Structure:
The body of the up-closing candle(s) must align with the liquidity sweep and the subsequent
downward price movement, reinforcing its role as a strong bearish signal.

What Is A ICT Bullish OB?

An ICT Bullish Order Block refers to the last down-closing candle(s) that precede a significant
upward price movement. These candles represent zones where institutional investors or “smart
money” have placed large buy orders, creating a strong foundation for future bullish momentum.

It’s important to understand that not every down-closing candle qualifies as a Bullish Order
Block. For a candle or group of candles to be considered a valid ICT Bullish Order Block, they must
form directly after a sweep of sell-side liquidity.

What Makes An Order Block High Probability?

A high-probability Order Block possesses several key characteristics that align with institutional
trading logic and market dynamics.

1. Creates a Fair Value Gap (FVG):

A high-probability Order Block often coincides with the formation of a Fair Value Gap (FVG).
This gap indicates inefficiency in price movement, where the market failed to fully balance buy
and sell orders. These gaps act as magnets for future price action, increasing the likelihood of
the price revisiting the Order Block.
2. Sweeps Liquidity:
Before forming a high-probability OB the market typically sweeps liquidity above or below key
levels. This liquidity sweep occurs when stop-loss orders are triggered, creating an
opportunity for smart money to enter or exit positions. The presence of a liquidity sweep
validates the strength of the Order Block.
3. Forms SMT (Smart Money Trap) with a Correlated Pair:
A high-probability OB often aligns with SMT, where a divergence or anomaly is observed
between correlated pairs. For example, one pair may make a higher high while another fails to
do so. This behavior indicates institutional involvement and strengthens the validity of the OB.
4. Aligns with Overall Order Flow:
The OB must align with the broader market trend or directional bias. For instance, in a bullish
market, high-probability OB will form in areas where institutional buying interest is evident,
ensuring they support the prevailing order flow.

By combining these factors—FVG creation, liquidity sweeps, SMT formation, and alignment with
order flow—you can identify Order Blocks with a higher likelihood of influencing price movement
effectively.

ICT Order Block Trading Strategy

1. Preparation And Analysis

Identify the overall market trend using higher timeframes (daily, 4H).
Mark significant support and resistance levels where institutional activity is likely.
Look for key liquidity zones (previous highs/lows, consolidation areas).

2. Order Block Identification

Bullish Order Block: Locate the last down-closing candle before a significant upward move.
Bearish Order Block: Locate the last up-closing candle before a significant downward move.
Ensure the Order Block aligns with a liquidity sweep and market structure shift.

3. Confirming Validity
Look for a Fair Value Gap (FVG) near the Order Block, indicating price inefficiency.
Check if the Order Block follows a liquidity sweep, where stop-losses are triggered.
Use correlated pairs to identify Smart Money Trap (SMT) divergences for additional
confirmation.

4. Entry Strategy
Wait for price to return to the identified Order Block zone.
Use lower timeframes (e.g., 1H, 15M) to refine the entry with confirmation signals like
candlestick patterns or structure breaks.
Enter at the top or bottom of the Order Block, depending on market direction.

5. Risk Management
Place stop-loss orders just beyond the Order Block to protect against invalidation.
Limit risk per trade to a percentage of your total capital (e.g., 1-2%).

6. Exit Strategy
Set profit targets based on nearby support/resistance levels or opposing Order Blocks.
Use partial take-profits to secure gains while allowing the trade to run.
Adjust stop-loss to breakeven or trail it as the trade progresses.

What Are The Different Types Of Order Blocks

There are two different types of order blocks.
i) Bullish Order Blocks
ii) Bearish Order Blocks

What Is The Success Rate Of OB Trading Strategy

The success rate of the Order Block (OB) trading strategy can exceed 75% when combined with
SMT divergence and higher timeframe analysis. However, the actual success rate may vary
depending on the trader’s skill level, understanding of market dynamics, and the prevailing market
conditions during trade execution.

seojinleelee
Hi, I’m Seojin Lee, an experienced trader focusing on the U.S. stock market, particularly NASDAQ and
E-mini S&P futures. As a Chartered Financial Analyst (CFA), I apply my knowledge of financial analysis
and market strategies to identify profitable opportunities.

I specialize in both short-term and long-term trading, always balancing risk management with market
trends. With years of experience, I continuously refine my strategies to adapt to market shifts. If you’re interested in
trading insights or strategies, you’ve come to the right place!

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