2022 ICT Mentorship Episode 6

Understanding Institutional Order Flow

Introduction to Price Internalization

• The session focuses on understanding institutional order flow and how to internalize price movements in trading.

• Emphasizes that trading should not rely on patterns or indicators but rather on the behavior of retail traders, aiming to enter trades where they typically do not.

Retail Trader Behavior

• Highlights that most retail traders lack consistency, which is crucial for successful trading. This inconsistency often leads to losses.

• Discusses the distinction between informed (smart money) and uninformed (speculative) traders, noting that many uninformed accounts fail due to poor decision-making.

Smart Money Trading Strategies

• Smart money does not depend on secret indicators; instead, they focus on timing and market conditions.

• Time is a critical factor for professional traders as it influences their engagement with price movements throughout the day.

Market Dynamics and Liquidity

• Smart money aims to exploit retail trader mistakes by manipulating market conditions, often leading them into losing positions.

• Many retail traders avoid using stop-loss orders due to fear of premature exits or significant losses, which can lead to further pitfalls.

Understanding Market Efficiency

• Smart money analyzes liquidity and market narratives rather than relying solely on technical analysis or chart patterns.

• The efficiency of the market allows smart money traders to capitalize on speculative liquidity provided by uninformed traders.

Conclusion: A New Approach to Trading

• The speaker critiques traditional technical analysis methods while advocating for a more intuitive approach based on real-time price action.

Understanding the Bearish ICT Fair Value Gap

Introduction to Fair Value Gaps

• The speaker emphasizes the importance of understanding fair value gaps, stating that the same logic will apply consistently throughout their teachings.

• A warning is issued against attempting to repackage this information into a mentorship course or for profit, highlighting that it is provided freely for educational purposes.

Characteristics of Bearish ICT Fair Value Gap

• The bearish ICT fair value gap represents institutional order flow and can be observed through market depth and volume profile analysis.

• The speaker stresses that interpretations of data are subjective; just because many traders share a belief does not validate its truth.

Structure of the Bearish ICT Fair Value Gap

• A bearish ICT fair value gap consists of a three-candle formation:

• First candle creates a high.

• Second candle must trade below the first candle's low.

• Third candle continues downward without trading back to the first candle's low.

• This formation results in a price gap where only sell-side orders are present, akin to uneven paint application on a wall.

Market Efficiency and Price Action

• The analogy of painting illustrates how price action reveals inefficiencies; as prices drop, gaps appear where buyers have not efficiently entered the market.

• The speaker argues that recognizing these inefficiencies can transform one's perspective on chart analysis, similar to Neo seeing the Matrix in binary code.

Trading Strategy with Fair Value Gaps

• When observing price action between specific candles, one should look for sell-side offerings indicating potential shorting opportunities when prices return to fill gaps.

• Optimal formations occur after price runs above previous highs before breaking down; traders should focus on identifying these patterns rather than seeking them out randomly.

Identifying Liquidity Pools

• Traders should look for liquidity pools formed by buy stops above recent highs; smart money aims to capitalize on these before entering short positions.

Understanding Fair Value Gaps in Trading

Identifying Candles and Fair Value Gaps

• The first candle represents the starting point, while the second candle indicates where the gap exists. The third candle defines the lower end of the fair value gap.

• The ideal entry point for trading is just above the high of the third candle, allowing for a straightforward limit order placement.

Managing Risk with Stop Losses

• Beginners should use wider stop losses to accommodate learning curves; experienced traders can reduce their stop loss ranges as they gain confidence.

• Emphasis on practice and backtesting is crucial before using real money in trading to avoid potential losses.

Market Structure Shifts

• A bearish market structure shift occurs when prices rise above an old high but then break down after reaching a new short-term high.

• Quick price movements are essential; significant displacement must occur rather than minor fluctuations to confirm market shifts.

Displacement High and Low

• The displacement low is identified below a broken short-term low, while the displacement high is marked by a previous peak.

• Traders should focus on identifying fair value gaps within this range, which will form based on market behavior.

Trading Patterns and Fair Value Gaps

• If prices run above an old high and then drop below it, traders should mark these points as displacement levels for future trades.

• A strong bearish candle closing below key levels signals potential fair value gaps that can be exploited for short selling opportunities.

Bullish Market Structure Shifts

Recognizing Bullish Patterns

• In bullish scenarios, three candles create a pattern: Candle one’s high becomes the low of the fair value gap, while Candle three’s low marks its upper boundary.

• Understanding how these patterns relate to sell-side liquidity helps traders anticipate market movements effectively.

Understanding Fair Value Gaps in Trading

Identifying Trade Ideas

• A trade idea emerges when the market closes above a certain level with energetic displacement. The next step is to identify if there is a fair value gap between the displacement high and low, right before bullish market structure breaks.

Importance of Fair Value Gaps

• The range for identifying a bullish fair value gap is crucial; if it doesn't exist within this range, no trade should be executed. This process is clear and consistent, emphasizing that traders must adhere strictly to these principles without introducing external concepts.

Price Action Analysis

• The analysis begins on a 15-minute chart of the e-mini Nasdaq, marking significant times such as 8:30 AM when employment data was released. Traders are encouraged to pause and analyze swing highs and stop runs at this time for better insights.

Time Frame Transitioning

• After establishing levels on the 15-minute chart, traders should transition down through various time frames (5-minute to 1-minute) to refine their entries based on observed price action and fair value gaps identified at each level. This methodical approach allows for tighter entries and risk management strategies.

Practical Application of Strategies

Understanding Market Movements and Trading Strategies

Introduction to Trading Tools

• The speaker discusses the use of a vertical line tool for marking significant price points, specifically at 8:30 AM, emphasizing its importance for students learning about trading.

• Acknowledges personal discomfort with using certain tools but recognizes their necessity for backtesting and understanding price action beyond static charts.

Analyzing Price Action

• The analysis begins with observing a short-term high and anticipating a run above it, indicating potential trading opportunities.

• Highlights the significance of market opening times (9:30 AM), noting that volatility typically increases during this period, which can lead to misleading signals.

Identifying Key Levels

• Describes how traders may be misled into taking long positions due to low formations while actual market behavior suggests caution.

• Emphasizes waiting for confirmation before entering trades, particularly looking for breaks above established levels on a one-minute chart.

Recognizing Fair Value Gaps

• Discusses the absence of fair value gaps in recent price movements, indicating no clear trading signal yet.

• Observes the formation of higher highs and emphasizes monitoring swing lows as critical indicators for potential trades.

Trade Execution Strategy

• Outlines a strategy where traders should look for breaks below swing lows to confirm bearish sentiment before entering trades.

• Suggests setting stop-loss orders strategically above previous candle highs to manage risk effectively when entering short positions.

Profit Taking Considerations

• Advises on multiple entry points based on candle patterns and highlights the importance of recognizing when to take profits based on fair value gaps.

• Recommends targeting specific profit levels while being aware of sell stops below equal lows as part of an effective exit strategy.

Conclusion: Timing and Risk Management

Understanding Trading Strategies and Market Dynamics

The Psychology of Trading Moves

• Discusses how certain market moves are designed to unsettle traders, leading them to exit positions prematurely. This tactic can result in traders being stopped out just before significant price movements occur.

Entry and Exit Strategies

• Emphasizes the importance of maintaining a protective stop while trading. It suggests that traders should avoid adjusting their stops too aggressively after taking partial profits, as this may lead to unnecessary losses.

Identifying Key Price Levels

• Highlights the significance of recognizing intermediate term lows on charts. Once these levels are breached, it provides an opportunity for traders to adjust their stops accordingly.

Targeting Price Movements

• Outlines a specific price level strategy for short selling, using 14,800 as a reference point for potential trades. It illustrates how understanding price ranges can inform trading decisions.

Practical Application and Real-Time Examples

• Introduces a paper trading account example to demonstrate real-time execution of trades based on discussed strategies. This practical application reinforces theoretical concepts with tangible results.

Risk Management and Trade Execution

Understanding Trade Logic

• Explains the logic behind entering short positions at specific price points while managing risk through limit orders. It stresses the importance of having clear entry and exit strategies.

Performance Metrics in Trading

• Cautions against overestimating returns from initial trades, encouraging realistic expectations about performance rather than focusing solely on high returns from single trades.

Utilizing Fibonacci Levels

• Discusses applying Fibonacci retracement levels to identify equilibrium prices within trading ranges. This technique helps traders understand market dynamics better by distinguishing between discount and premium pricing zones.

Building a Sustainable Trading Practice

Internal vs External Range Liquidity

• Differentiates between internal range liquidity (trading within established highs and lows) versus external range liquidity (stops placed outside these boundaries), which is crucial for effective trade management.

Continuous Learning in Trading

• Encourages ongoing education in trading practices through bite-sized learning segments, emphasizing that mastery comes with practice over time rather than immediate comprehension.

Mentorship and Community Support

• Highlights the value of mentorship in trading education, suggesting that consistent guidance can help new traders navigate complexities more effectively while building confidence in their skills.

The Efficacy of Trading Models

Validating Trading Models

• Reiterates that successful models have been tested repeatedly under various conditions, providing assurance that they work when applied correctly by informed traders.

Engaging with Demo Accounts