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ICT Mentorship Core Content - Month 04 - Divergence Phantoms
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ICT Mentorship Core Content - Month 04 - Divergence Phantoms

Teaching 7 of 8: Momentum Divergence, Phantoms, and Market Maker Traps

In this teaching, the focus is on momentum divergence, phantoms, and market maker traps. The instructor explains that while indicators are mathematically derived and measure the past, they can be useful for understanding price action in relation to indicators. However, it is important to note that indicators do not drive price; instead, we can reverse engineer the thought process behind price movements by considering market efficiency and liquidity.

Momentum Divergence

  • There are two types of divergence: type one bearish divergence (higher high in price but not in momentum) and type one bullish divergence (lower low in price but not in momentum).
  • Hidden divergence, also known as type two trend following divergence, occurs when there is a higher low in price but a lower low in stochastic or other momentum indicators.
  • Nick Van Nice is credited with introducing hidden divergence to the trading community.

Indicator-Based Trading

  • Indicators should not be solely relied upon for trading decisions.
  • Studying price action and understanding market conditions are crucial factors for successful trading.
  • It is essential to consider if the market is bullish or bearish before making trading decisions based on indicators.
  • Time plays a significant role in determining whether it is an appropriate time to trade or if the market is consolidating.

Example Analysis - USCAD One-Hour Chart

  • Analyzing a specific example on the USCAD one-hour chart from November 10th and 11th.
  • Observing how the market made a slightly higher high while momentum was already showing potential bearish divergence.
  • Understanding different types of divergences helps identify potential entry points for bullish or bearish markets.

Importance of Price Action-Based Trading

  • Indicator-based trading alone does not provide a comprehensive understanding of market dynamics.
  • Price action-based trading considers market sentiment and the behavior of retail-minded traders.
  • It is crucial to study price and not solely rely on indicators for trading decisions.

Understanding Hidden Divergence

This section focuses on hidden divergence, a type of trend-following divergence. The instructor emphasizes the importance of understanding hidden divergence as a powerful tool for identifying momentum entry points in bullish markets.

Hidden Divergence Explained

  • Hidden divergence occurs when there is a higher low in price but a lower low in stochastic or other momentum indicators.
  • George Lane is often mistakenly credited with discovering hidden divergence, but it was actually introduced by Nick Van Nice.
  • Hidden divergence provides valuable insights into potential bullish market movements.

Importance of Recognizing Hidden Divergence

  • Understanding hidden divergence allows traders to identify favorable entry points during bullish trends.
  • While indicators can be helpful, they should not be solely relied upon for trading decisions.
  • Incorporating market sentiment and studying price action are essential components of successful trading strategies.

Analyzing Price Action and Bearish Divergence

This section delves into analyzing price action and bearish divergence. The instructor shares personal experiences from 1992 and 1993 when he started trading based on bearish divergences without considering liquidity levels above certain highs.

Analyzing Bearish Divergence Example

  • Examining an example where price makes a higher high while the indicator fails to make a higher high, indicating potential bearish divergence.
  • However, it is important to consider liquidity levels above the high before making trading decisions solely based on bearish divergences.

Importance of Liquidity Levels

  • Liquidity levels play a crucial role in determining whether price will continue rising or reverse direction.
  • Traders need to consider buy stops above certain highs that may prevent prices from dropping significantly.
  • Understanding liquidity levels helps avoid potential traps and false trading signals.

Indicator-Based Trading vs. Price Action-Based Trading

This section highlights the differences between indicator-based trading and price action-based trading. The instructor emphasizes the limitations of relying solely on indicators for trading decisions.

Limitations of Indicator-Based Trading

  • Indicator-based trading promotes the idea that studying price is unnecessary, as indicators provide all the necessary information.
  • However, this approach oversimplifies trading and ignores crucial factors such as market conditions and timing.
  • There are more than four conditions to consider (overbought/oversold and bullish/bearish divergence), including whether it is an appropriate time to trade.

Importance of Price Action-Based Trading

  • Price action-based trading considers market sentiment, liquidity levels, and retail-minded traders' behavior.
  • Studying price action provides valuable insights into market dynamics and helps make informed trading decisions.
  • Indicators should be used as supplementary tools rather than the sole basis for trading strategies.

The transcript has been summarized in a clear and concise manner using timestamps when available.

Understanding Hidden Divergence

This section discusses hidden divergence or trend-following divergence and its significance in trading.

Hidden Divergence Explained

  • Hidden divergence occurs when there is a low that corresponds to a cycle through on stochastic, followed by a higher low with a lower low on stochastic.
  • This type of divergence is considered powerful and can provide valuable insights into price movements.
  • Retail traders often focus on indicators to identify tops and bottoms, but indicators alone cannot accurately predict future price movements.
  • Market makers and funds are more interested in the thought processes of participants and the liquidity levels in the market.

Manipulating Price Movements

  • Market makers manipulate their decisions based on what they anticipate retail traders will do based on indicators.
  • Funds, especially those following long-term momentum trends, can also be targeted during consolidations or market tops.
  • By pushing price above an old high or below an old low, market manipulators can access pools of liquidity from stop orders placed by retail traders.

Different Perspectives

  • Retail traders view price through the lens of indicators and look for bearish or bullish divergences to capture tops or bottoms.
  • However, professional traders focus on qualified entries, exits, and specific targets rather than trying to time exact tops or bottoms.

Analyzing Divergence Types

This section delves deeper into different types of divergences and how they are perceived by different types of traders.

Bearish Divergence Perspective

  • Some traders perceive a higher high in price followed by a subsequent movement lower as bearish divergence indicating a potential top.
  • They aim to sell short based on this bearish divergence signal.

Understanding Trader Mindset

  • Many retail traders prioritize getting in at the lowest point possible without considering qualified entries, exits, or specific targets.
  • Waiting for the stochastic to cycle down below a certain low can help anticipate further price movements and identify potential stop orders.

Hidden Divergence Analysis

  • Hidden divergence is not based on oversold or overbought conditions but rather on observing momentum shifts.
  • By analyzing hidden divergence, traders can anticipate price movements that may contradict traditional bearish or bullish divergences.

Market Awareness and Price Movements

This section explores how markets are aware of traders' thought processes and how this awareness influences price movements.

Market Efficiency Paradigm

  • Retail traders view price through indicators, while market makers focus on participants' thought processes and manipulate their decisions accordingly.
  • Markets have an uncanny ability to be aware of traders' orders, leverage, excitement around specific levels, and overall trading activity.

Anticipating Price Movements

  • When hidden divergence occurs, it indicates a higher low relative to a previous low in price with a lower high in momentum.
  • This type of divergence suggests that price will move higher due to the liquidity available at specific levels rather than traditional bearish divergences.

Conclusion

In this transcript, we learned about hidden divergence and its significance in trading. We explored different types of divergences and how they are perceived by retail traders versus professional traders. Additionally, we discussed market awareness and how it influences price movements. Understanding these concepts can help traders make more informed decisions when analyzing charts and identifying potential trading opportunities.

New Section

In this section, the speaker discusses a scenario where price has rallied higher and identifies a potential type 1 bearish divergence. The speaker explains that while retail traders may interpret the higher high in price as bullish, the stochastic indicator shows a downward crossover, indicating lower prices.

Identifying Bearish Divergence

  • The speaker points out that retail traders expect the price to drop based on classic support and resistance levels.
  • Retail traders anticipate a move down to previous lows as they perceive this as a top and expect price to trade all the way down to those levels.
  • However, the speaker explains that based on the stochastic indicator, which does not show a higher high like price does, it suggests that price will go lower.

New Section

In this section, the speaker discusses using specific reference points and expectations for price movement. They explain how they anticipate consolidation or retracement before expecting an upward move.

Anticipating Price Movement

  • The speaker mentions using a specific low on the stochastic indicator as a reference point for anticipating consolidation or retracement.
  • They clarify that they do not expect price to go below that low but rather anticipate it to trade higher due to institutional overflow supporting higher prices.
  • The speaker emphasizes their different approach compared to retail traders who are expecting further downside based on classic divergence signals.

New Section

In this section, the speaker analyzes a specific candle's range and explains their expectation of price movement within that range. They discuss how their approach differs from retail traders' mindset.

Analyzing Candle Range

  • The speaker focuses on a particular candle's range and expects price to trade down into it without violating its low.
  • They explain why they use the body of the candle instead of its high for reference, considering the condition and previous price action.
  • The speaker highlights that their approach contradicts the expectations of retail traders who anticipate a sell-off and a break of the low.

New Section

In this section, the speaker provides examples of divergence scenarios and explains how they can mislead traders. They caution against relying solely on indicators for trading decisions.

Divergence Scenarios

  • The speaker shares examples of bearish divergences where retail traders would expect price to go lower based on classic divergence signals.
  • However, in these examples, price does not sell off as expected but instead continues higher, causing confusion for those relying solely on indicators.
  • The speaker emphasizes that indicators alone are not sufficient and should be used with a solid understanding of market dynamics.

New Section

In this section, the speaker further discusses bearish divergences and how they may not always result in expected price movements. They emphasize the importance of understanding market dynamics rather than relying solely on indicators.

Bearish Divergence Misconceptions

  • The speaker points out another example of a bearish divergence where retail traders would expect a sell-off based on classic divergence signals.
  • However, price continues to move higher instead of making a lower low as anticipated by retail traders.
  • The speaker advises against relying solely on indicators and encourages traders to have a deeper understanding of market dynamics.

New Section

In this final section, the speaker concludes by reiterating that indicators alone are not enough for successful trading. They emphasize the importance of having a solid foundation in understanding market dynamics.

Importance of Market Understanding

  • The speaker emphasizes that using indicators without an understanding of market dynamics can lead to incorrect interpretations and trading decisions.
  • They encourage traders to focus on learning and understanding market dynamics rather than relying solely on indicators.
  • The speaker concludes by advising viewers to approach indicators with a strong foundation in market knowledge.

The transcript provided does not include specific timestamps for each section. Therefore, the timestamps mentioned in the summary are approximate and may not align exactly with the content of the transcript.

Playlists: 2016 ICT Private Mentorship Core Content Month 04
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2016 Premium ICT Mentorship Core Content Video Lectures Audio and visuals are exactly as they were distributed in December 2016. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN Trading performance displayed herein is hypothetical. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance trading results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. Trade at your own risk. The information provided here is of the nature of a general comment only and neither purports nor intends to be, specific trading advice. It has been prepared without regard to any particular person’s investment objectives, financial situation and particular needs. Information should not be considered as an offer or enticement to buy, sell or trade. You should seek appropriate advice from your broker, or licensed investment advisor, before taking any action. Past performance does not guarantee future results. Simulated performance results contain inherent limitations. Unlike actual performance records the results may under or over compensate for such factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profits or losses to those shown. The risk of loss in trading can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. If you purchase or sell Equities, Futures, Currencies or Options you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you may be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a “limit move.” The placement of contingent orders by you, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.