Order block retest: buying the return to where the move began
The last red candle before a breakout often marks where the move started. How to buy a return to it at a discount, and what to check before you do.
Key takeaways
- The order block is the last red candle within the 10 candles before a break of structure, and it is dead once a close goes below its low.
- Only buy the return when the close is in discount, below the middle of the move.
- The stop goes under the block's low, because a close below it means the idea has failed.
In this article
Before a strong move up, there is often one last red candle where sellers had their final say. This setup marks that candle as an “order block” and waits for price to come back to it after a breakout. If buyers step in there again, it buys. Traders use it because it turns a vague “buy the pullback” into a specific zone with a clear point where the idea is wrong.
Order blocks, premium and discount
The setup starts with a break of structure (BOS): a candle that closes above the last swing high. A swing high is a candle whose high is above the highs of the 3 candles before it and the 3 after it. You only know it is a swing high 3 candles later.
The order block is the last down (red) candle within the 10 candles before that BOS. In “smart money concepts”, a popular chart-reading framework, this candle is described as the place where large buyers absorbed the last selling before pushing price up. That story is an interpretation, not something the chart can prove. What the chart does show is a zone where the move began, and price often reacts when it returns to such zones. The block stays alive until a candle closes below its low. After that, it is dead and the setup is off.
The setup also uses premium and discount. Take the move from the lowest low since the order block to the highest high since the BOS candle, and mark its midpoint. Prices above the midpoint are in “premium”: you would be paying up, late in the move. Prices below it are in “discount”: you are buying back near where the move started. The rules only buy in discount, which keeps the entry close to the stop and leaves room to the high.
Stop buffers use ATR (average true range), the typical size of a candle over recent candles, so they scale with how volatile the coin is.
The rules, precisely
Here is one precise, testable version of this strategy. Traders vary these numbers, so treat it as a starting point. The rules are written for a long. The short is the mirror image: the last green candle before a break below the last swing low, retested from below while price is in premium.
- Order block: a bullish order block from a BOS in the last 48 candles, still alive (no close below its low).
- Retest: this candle came back into the order block. Its low is at or below the block's high, and its close is at or above the block's low.
- Discount: the close is below the middle of the move, which is the midpoint between the highest high since the BOS candle and the lowest low since the order block.
- Confirmation: this candle closed green.
- Entry: at the close of this candle.
- Stop: below the order block's low, minus 0.2 ATR.
- Target 1: the highest high since the BOS.
Where it works
- In an established uptrend, where deep pullbacks get bought.
- When the BOS was decisive, with a clear close well above the old high.
- When the order block is a normal-sized candle, giving a stop that is neither tiny nor huge.
- On the first return to the block after the breakout.
Where it fails
- In ranges, where breaks of structure are frequent and quickly undone.
- When the pullback is the start of a reversal, not a pause.
- When the order block is a large candle, so the stop is far below and the size has to be small.
- When the move was small, so the high is less than 1.5 R above the entry.
What to check
- Which candle is the order block? Count back from the BOS candle and find the last red candle within 10 candles. If there are several small red candles in a cluster, the rule picks the last one. Check that it is a sensible zone, not a tiny doji that gives a stop inside the noise.
- Is the pullback slow or violent? A calm drift back into the block on shrinking candles looks like profit-taking. A fast, heavy drop straight through half the move looks more like sellers taking over, and the block is more likely to break.
- Is the close really in discount? Recalculate the midpoint with the latest highs and lows. If price pushed higher after the BOS, the midpoint moved up too. A close just under the midpoint is a shallow discount and gives less room.
- What is the bigger timeframe doing? The next timeframe up is trending up when its close is above its 20 EMA and the 20 EMA is above the 50 EMA. The EMA (exponential moving average) is an average of recent closes that weights the newest more. Buying an order block against a falling bigger trend is a lower-odds trade.
- Is there a level in the way? Check what sits between entry and the high: the previous day's high, an old swing high, or the top of the recent volume profile. A strong level before the target can stall the trade.
- Do the fees still fit? On 15-minute candles, a small order block means a tight stop. If fees of 0.1% each way cost more than 0.3 R, the setup is skipped because most of the gain would go to the exchange.
The fair value gap retest uses the same break of structure and buys the return to the gap left by the move instead. Whichever you use, backtest it with fees on the coin's own recent history first. None of these rules is known to make money.
Stops, targets and the time limit work the same way for every setup in this series. See managing a setup: stops, targets and the time limit.