Traders try out different strategies in the market, attempting to achieve profitable trades but tend to ignore one key factor: market timing. Predicting when the market is going to turn can stack the odds in your favor, and one of the ways to do it is to pay attention to the big players.
Central banks and other financial institutions can manipulate the market through their orders, throwing supply and demand slightly out of order and creating lucrative opportunities.
While this went unnoticed by individual traders two decades ago, things have changed. Individual traders can now use advanced strategies, tools, and trading platforms to trade with the big players. Since these financial institutions exert major control over the market, it makes sense to understand how to include their activity in your trading strategy.
Central Bank & Institution Orders
Actions for Central Banks and institutions can drive the market with their economic policies and purchases in various financial markets. Recognizing such purchases from central banks and institutions is key to identifying key areas of supply and demand.
While it doesn’t guarantee profitable trades, using this method as part of your trading strategy can help you identify low-risk entry points with the highest chances of success.
Central Banks and institutions buy and sell assets that are used by ordinary people, and due to the capital at their disposal, they use special orders when buying, taking profit, and closing trades.
This happens because they can upset the market, which may have a negative impact on their trade. For instance, if an institution wants to place a 180 million buy order on an asset like GBP/USD but only 60 million are being sold, it will not be able to place its order at once.
If they place a 60 million buy order, it will be executed, but this will affect their profitability due to the sudden increase in volume. But if they broke it down to chunks of 30 million, they can make their orders without creating sudden jumps in price.
These chunks are spread out and they can make the small purchase several times in a day until their order is filled. When chucks of orders are made by institutions, it creates a supply and demand zone from a tight consolidating range.
Recognizing Purchases from Banks & Financial Institutions
These financial institutions don’t announce when they are going to make orders, but there are some methods you can use to identify when they are making a move:
Using Chart Patterns
Orders from banks tend to create consolidations or sideways movement. Finding the consolidation area can be a bit difficult because there are other factors that can cause sideways movement in the market.
To determine if such consolidation was caused by bank order, identify a consolidation area and check if the prices are fluctuating at a very close range. Such conditions mostly form when a bank or institution makes a purchase. After identifying the zone on the chart, look out for patterns like the engulfing bar or Doji before taking any action.
Look for long ranges
The longer the range, the bigger the order being made. When central banks and institutions purchase assets, they extend the range period because it makes it easier for them to make all their purchase around the same prices without increasing the market’s volatility or dealing with trending markets.
Include volume indicators
Not every range is caused by central bank orders, and the best way to identify if the range is caused by big purchases is necessary to use volume indicators. These indicators show you if there is an increase in volume in the market and whether an accumulation in a supply and demand zone is due to the actions of a big player.
Forex Order Blocks
Order block forex refers to a collection of orders made by banks or big financial institutions in the forex market. As mentioned earlier, these institutions like to maximize their profit potential by breaking down their order into several blocks.
An order block in forex trading can serve as a technical analysis tactic for tracking the accumulation and distribution of orders and form an essential part of a trading strategy.
Using order block forex is vital when trading because it takes the guesswork out of the equation and it is one of the trading hacks used by pros. Although you will need further confirmation with technical indicators, including order blocks in your strategy helps you to get an idea of what the institutional sentiment is rather than going through the process of reading reports and news.
In addition, order blocks work in all financial markets and will remain useful for a long time because big institutions are using them.
Types of Order Block Forex
Order blocks are divided into two types:
Bullish Order Block
A bullish order block occurs when a big financial institution or the central bank buys a large number of a specific currency. For example, if the United States Central Bank wants to weaken the value of the US dollar versus the Canadian dollar to stimulate growth, the bank can buy up large quantities of the Canadian dollar.
When a bullish order block, the market enters into an upward trend. After the bullish trend is established, look out for pullbacks and identify liquidity pools above a previous bearish order block.
Bearish Order Block
A bearish order block happens when a financial institution or bank sells a large quantity of the counter currency, probably to strengthen its currency value. When this occurs, the price breaks below the support level and moves in the intended direction.
When the market becomes bearish, look out for new bearish order blocks for short positions and target liquidity pools below old bullish order blocks.
Trading Forex Order Blocks
Understanding order blocks gives you an edge when trading in volatile markets, but it shouldn’t be used alone. The first thing when trading order blocks in forex is to draw the block. For the bullish order block, look for a downtrend and mark the recent swing low and swing high.
Then, draw a rectangle from the high to low and extend it to the right part of the chart where the price will react in the near future.
The process is similar for a bearish order block with a few variations. Here, the recent swing high is marked first before the swing low, and a rectangle is drawn around it. After drawing the order block, the price is expected to move away in either a bullish or bearish direction quite fast.
If this type of reaction doesn’t happen, then the order block doesn’t offer a high chance of success, and you may have to reevaluate your analysis. Where there is a retracement, it should retrace between 62% and 79% Fibonacci levels.
However, there are no set rules for how long the price will retrace before it continues in its intended direction. For the order block to be valid, the price should not close below the middle range of the order block.
When the bullish order block zone forms, open a buy order above the zone and set your stop loss a few pips below the zone. For a bearish order zone, open a sell order below the order block zone and place a stop loss a few pips above the zone.
ALSO READ: Useful trading tips from professional traders.
Order blocks reflect the market behavior of big financial institutions. It gives you the opportunity to look at the digital footprints of institutions that show where they are going to put their order chunks. They are useful to forex traders due to the decentralized nature of the market.
Identifying forex order blocks is difficult, and most times, traders don’t realize that they are looking at it when examining a consolidation.
Although there are certain overlaps between it and other techniques like supply and demand, the logic behind it is not the same as the rest. Therefore apart from a reliable setup, it is advisable to have the right trading psychology to deal with the difficulty of understanding order blocks and trading with them.
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