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Vocab
Pullback - Healthy markets have an ebb and flow, rising and falling. When momentum slows, stocks pullback, or price falls, due to profit taking by hedge funds (30% is a common target to take some profit). The same is true when hedge funds are shorting and buyback their positions.
Break in Structure - Continued momentum in the current direction
Liquidity - Area where there has been either a high number of buyers or sellers. These areas are often the result of hedge funds wanting to move their positions.
Breaker Block - This is an identified area of liquidity. We often identify the area based on a candle reversal pattern. We look for the market to respect or reject the breaker block to determine the continued direction of the market.
Order Block - Order blocks are large orders placed by hedge funds. When hedge funds want to buy or sell their position, they may be attempting to sell millions of shares. The problem is that they need to find enough buyers and sellers to fulfill their entire order; thus creating liquidity or breaker blocks.
Imagine a company wanting to sell 2M shares
When it hits the price they want to sell their shares needs to find 2M buyers of their shares, but there are others in the market also selling as well.
If one hedge fund sells their position, others may follow suit causing a larger move
Another thing to note is that while the company may have a huge order block to sell at $200, if they sell 1M at $200 and the price still rises due to people buying, hedge funds could be fortunate to sell more shares at prices above $200 (e.g. $205, $210) until their entire position is sold off.
Bullish Breaker Block
Bullish Breaker Block
We see where it is marked "Valid Bearish Order Block" signifying a reversal in price downward
We see the candles reverse back down (pullback) and then rise and close above the order block (break in structure - continued momentum upwards)
With an invalidation of the order block (close above block), we see hedge funds sweep liquidity (stops placed by shorts and those wanting to take profit)
Once we see price rise above we are looking to either enter on the break or to wait for a retest of the breaker block
In this case, we see it reach below the breaker block (long wicks), but no closed candle below the breaker block
Our entry would be on the reversal from the breaker brock upward with a target of the previous high
You would want to switch to a lower time frame to target an entry
Trading the Bullish Breaker Block
Trading the Bullish Breaker Block
While this chart does not show it, you would switch to a lower time frame to target a move back up as long as a candle does not close below the order block.
Once we have our entry, we put our stop below the order block and target the previous high
We see that the breaker block acts as support and we play long
Bearish Breaker Block
Bearish Breaker Block
The same is true for a short position
We see the market create a Bearish Breaker Block when we see a reversal back up
We invalidate the breaker block when we close below
We look for retests of the breaker block to act as resistance to play it short
Trading the Bearish Breaker Block
Trading the Bearish Breaker Block
Similar to long positions, we use the top of the breaker block as our stop
We use a lower time frame to find our entry
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