In-Depth Notes on ICT's Institutional Order Block Theory

Trading Using ICT's Institutional ORDER BLOCK Theory

Concept Overview

  1. Identifying Order Blocks (OBs)

    • Begin with higher timeframes (TFs) like Daily (D1) and then move to H4.
    • Determine the order flow or institutional trend through D1 and H4 TFs.

  2. Creating Lower Timeframe Order Blocks

    • After establishing the long-term trend, construct OBs on lower TFs (H1 and M15).
    • M15 is used for entries aligned with the higher TF order flow because it reflects the true trend.

  3. Order Block Mechanics

    • If price breaks an OB, wait for a Return to Order Block (RTO) before entering a trade.
    • This is referred to as Last Step Broken + Retest (LSB + Retest).
    • It’s possible to trade the break without a retest, but be cautious of a potential return to the broken OB.
    • Aim to take trades from Source to Source, meaning trading from peak to peak.

  4. H4 and M15 Integration

    • Analyze the Monthly, Weekly, and Daily charts:
      • Bearish Scenario: If all these charts are bearish, expect lower TFs to retrace higher before going back to a premium (over 50% bullish retracement), targeting buy-side liquidity.
      • Bullish Scenario: If all these charts are bullish, expect lower TFs to retrace lower, entering a discount (over 50% bearish retracement), targeting sell-side liquidity.

Understanding Order Blocks (OB)

  • Definition of OB: A price range or candle where institutions buy or sell against the retail trend.
  • Institutions leave OBs for future trades, reversing prices to previous orders before moving in the direction of the real trend.
  • An violated order block becomes a Breaker, which is retested.
  • Do not trade OBs immediately; wait for price to return to the OB before entering the trade.

Types of Order Blocks

  1. Bullish Order Block (BUB): A down close candle before an upward movement, indicating potential market structure shift from bearish to bullish.
  2. Bearish Order Block (BEB): An up close candle before a downward movement, indicating potential market structure shift from bullish to bearish.

Orders of OBs

  • Source OB: The lowest down close candle with substantial range near support, indicating bullish reversal.
  • Breaker OB: Occurs when previous lows are violated, signaling potential trading setups.
  • Continuation OB: Traditional setups that support prevailing trends.

Validating Bullish Source Order Block (SOB)

  • A Bullish SOB is validated when the high of the lowest down close candle is exceeded by a later formed candle.

Entry Techniques for Bullish SOB

  • Enter when price returns to the Bullish Order Block after trading higher, validating bullish sentiment.

Risk Management

  • Place a stop-loss just below the low of the Bullish Order Block.
  • After a price movement away from the OB, adjust the stop-loss above the 50% mark to minimize risk.

Understanding Bearish Order Block (BEB) and Breaker Blocks

  • Bearish SOB: An up close candle before a downward movement, indicating a shift from bullish to bearish.
  • Entry for Bearish SOB: Wait for the price to decrease and return to the Bearish Order Block before entering trades.
  • Risk Management: Stop-loss above the high of the Bearish SOB, with adjustments afterward to minimize risk.

Bullish Breaker Block

  • Identified when previously violated swing highs experience retracement, offering a potential bullish trade setup.

Bearish Breaker Block

  • Identified when previously violated swing lows experience retracement, offering a potential bearish trade setup.

Conclusion

  • Understanding the structure and behavior of Order Blocks aids in trading effectively.
  • Always confirm the expected movement with market conditions and use risk management techniques to protect trades.

Credits

  • Michael J. Huddleston (2016 ICT Study Notes)
  • Bishopraj (Simply Pips)
  • Bheki Mpangane (Bfx Strategy Training)
  • Luis Riesco (Market Makers Method)