Deconstructing Forex Charts: Identifying Institutional Order Blocks & Liqui

Imagine you are looking at a huge world map, showing where all the money in the world is flowing. This map is what adults call a Forex chart. It looks like a “connect the dots” game with zigzagging lines and colorful blocks. However, here’s a secret, those lines don’t just move randomly. They are moving because the Big Players, the giant whales of the ocean, swim through the water, pushing the waves around.

In this guide, we are going to learn how to spot where these whales are hiding and how to make sure we don’t get caught in their traps. By the end of this guide, you’ll be equipped with the right knowledge you need to identify an institutional order block. Let’s get started:

What are Forex Charts and Why Do They Look Like Mountains?

If you look at Forex trading charts, you are seeing a story in front of you. Each little bar, or what’s called a “candle,” on the screen tells you if a currency, like the British Pound or the US Dollar, is feeling strong or sluggish. If the bars are rising, then the “market” is bullish. If the lines are falling, it means traders are selling the currency.

Think of the chart like a playground. Sometimes we are all going down the slide, and sometimes we are all going up the jungle gym. This is how we can tell what the major banks and large companies are doing with their billions of pounds. All this leaves “footprints” behind, and if we are good detectives, we can follow those footprints and see where the price can go next.

What is an Institutional Order Block?

An “Order Block” is a fancy name for a footprint which is left behind by a “whale” (a big bank). Because these banks have so much money, they cannot buy everything at once. If they did, then prices would have exploded upwards too quickly! Instead, they place large “blocks” or clusters of orders.

Imagine you have to buy a million LEGO bricks. You can’t put them all in one shopping basket, can you? His high piles at the back of the store would be the only solution. An order block is like that pile of LEGOs. On a chart, this usually looks like the last candle that went against the flow before a massive explosion of movement occurred. In this case, the last red candle before the price took off is checked out.

How Can We Identify a Liquidity Trap?

This is where it gets a little complicated! A liquidity trap is the "trick" or “prank” played by the big whales. Sometimes, it seems like the price is going to do something really obvious, like jumping over the wall. This is what many people call breakout trading, meaning traders wait to see if the price will break through a ceiling (resistance) or a floor (support) and then jump to follow it.

Sometimes, large traders manipulate the market by pushing the price slightly above a resistance level to trigger buying activity. Once enough buyers have entered, they quickly sell their holdings, causing the price to drop sharply. This tactic, known as a "trap," exploits unsuspecting investors by luring them in before executing a rapid exit. It resembles a game of tag, where the supposed safe moment is a trick to catch the unwary.

Why do big Banks Want to Cheat Smaller Traders?

It sounds a bit mean, doesn’t it, like a playground bully? But in the world of money, that’s just how the game is played. The big banks require “liquidity” to complete their massive trades. Liquidity is just a fancy term for “enough counterparts to trade with”.

If a bank wants to sell a billion pounds, they have to find people who want to buy a billion pounds. They then create a ‘trap’ breakout, convincing a lot of small traders to buy. Big banks have to find buyers of a billion pounds if they want to sell a billion pounds; creating a “trap” breakout convinces hundreds of small players to buy, and when all those small players buy, big banks get exactly what they need, people to sell to (Johansen, Around 25 mins, 2017). This knowledge can be used to wait for real breakouts or fake outs that force breakout traders into a trap.

Conclusion

Being familiar with Forex charts offers numerous advantages. It bridges the gap between non-technical traders and the market, enabling better analysis and decision-making. Rather than just moving randomly, the prices and the date are driven by Institutional Order Blocks, which are clusters of orders where world banks accumulate their global positions. However, these banks sometimes orchestrate liquidity traps to trap retail traders.

By identifying these traps, savvy traders can avoid becoming the counterparty to a bank’s trade rather than simply following the path of smart money.