2022 ICT Mentorship Episode 2

Understanding Market Dynamics and Liquidity

The Role of Buy Stops and Market Movements

• Buy stops act as counter parties for traders looking to short, creating significant price movements in the market.

• Anticipate stop hunts on buy stops or short-term highs during significant price drops; this is a common occurrence in daily trading.

• Trend lines are used to define key levels but should not clutter charts; focus on naked charts for clarity.

Importance of Liquidity Levels

• Recognizing liquidity levels helps maintain focus amidst market fluctuations, preventing confusion from candle formations.

• Traders often get trapped when sell-side liquidity is attacked, leading to false breakouts that can be exploited by algorithms.

Trading Strategies and Market Structure

• Retail traders are advised to place buy stops above resistance levels, but these strategies may only work temporarily.

• Understanding market structure is crucial; look for relative equal highs before expecting lower prices based on weekly trends.

Analyzing Lower Time Frames

• After identifying liquidity pools, switch to lower time frames (like 2-minute charts) for specific trading signals.

• High-frequency trading algorithms operate primarily within shorter time frames (seconds to three minutes), making them ideal for spotting imbalances.

Break in Market Structure

• A break below a short-term low indicates a shift in market structure; this aligns with bearish expectations from higher time frames.

Understanding Market Structure and Trading Strategies

The Importance of Chart Patterns

• The speaker emphasizes the frequent occurrence of specific chart patterns in trading, suggesting that traders will encounter these formations almost daily.

• These patterns often involve running stops and creating short-term lows, indicating a break in market structure when a low is broken.

Identifying Imbalances for Trading Opportunities

• Traders should look for imbalances in the market after identifying breaks in structure; this is where selling opportunities arise.

• By scaling down to lower time frames (e.g., from three-minute to one-minute charts), traders can find more precise entry points for trades.

Fair Value Gaps as Key Indicators

• The concept of "fair value gaps" is introduced, which are not commonly found in traditional trading literature but are crucial for understanding price action.

• The speaker claims to have introduced this concept back in 2016, highlighting its effectiveness and popularity among traders.

Developing Independence in Trading

• Emphasis on building a foundational understanding of trading frameworks rather than relying on external systems or signal services.

• The goal is to educate students so they can independently identify setups without needing constant guidance or support.

Clarity Over Complexity in Trading Strategies

• A clean chart with minimal distractions allows for better reading of price action; the speaker discourages focusing on small incremental gains typical of high-frequency trading strategies.

• While acknowledging that profitable high-frequency trades exist, the speaker advocates for finding larger swings instead of chasing small profits through numerous contracts.

Weekly Candle Analysis and Seasonal Trends

• Before each new trading week begins, traders should analyze what they expect from the upcoming weekly candle—whether it will go higher or lower.

Market Analysis and Trading Strategies

Current Market Conditions

• Discussion on the Federal Reserve's potential interest rate hikes, which are causing volatility in the stock market during earnings season.

• The speaker anticipates that the weekly candle will expand downwards towards a low that has not yet been broken, indicating a bearish outlook for upcoming trading sessions.

Understanding Price Movement

• Emphasis on how price levels act like magnets, drawing prices toward specific points based on market conditions and seasonality.

• The importance of experience in understanding the speed and magnitude of price movements; this knowledge cannot be easily taught but must be practiced.

Weekly Candle Focus

• New traders should concentrate on where the weekly candle is likely to move rather than trying to trade every session, which can lead to unrealistic expectations.

• Highlighting the risk of developing irrational decision-making patterns after experiencing both winning and losing trades.

Analyzing Swing Highs and Lows

• Traders should identify swing highs and lows to locate willing sellers at lower prices relative to previous levels, setting up for potential trades.

Imbalances in Price Action

• Identification of an imbalance created by a single candle movement; understanding these imbalances is crucial for effective trading strategies.

• Explanation of how price action fulfills its role by balancing buy-side offerings with sell-side offerings through efficient delivery mechanisms.

Daily Chart Insights

• Acknowledgment that traders will inevitably miss opportunities or make mistakes; it's important not to dwell on these errors but learn from them.

• Precision in identifying repeating elements within price action can significantly enhance trading decisions.

Hourly Chart Framework

• Transitioning from daily analysis to hourly charts helps delineate weekly ranges more clearly, starting from Monday's open to Friday's close.

Market Dynamics and Liquidity

Understanding Market Movements

• The week has shown a bearish trend, with the market declining since the beginning. A short-term high and low have been established, indicating buy stops above the high and sell stops below the low.

• The market initially trades down to take out sell stops, which induces short positions among traders. This move is designed to create liquidity even if the ultimate goal is to drive prices lower.

• After triggering shorts, the market begins to rise against those who are already in short positions. This upward movement targets buy stop liquidity pools, punishing those who entered short too early.

• When buy stops are triggered, they convert into market orders that flood in at higher prices. This influx of buyers provides an opportunity for smart money traders looking to sell at these elevated prices.

• It’s crucial to anticipate stop hunts on buy stops or short-term highs before significant price movements occur. Conversely, when expecting higher prices, one should look for stop hunts on sell stops or short-term lows.

Analyzing Price Action

• Transitioning to a 15-minute timeframe reveals defined levels of support and resistance through trend lines. These levels help traders focus on areas of liquidity amidst fluctuating candle formations.

• Maintaining awareness of where liquidity lies is essential; losing sight can lead to confusion during trading sessions. Drawing levels helps reinforce this understanding as you develop your trading skills.

• The initial drop takes out cell-side liquidity by triggering traders who sold on breakouts. As algorithms push back up towards previously established equal highs, retail traders perceive this as resistance.

• Retail strategies often suggest placing buy stops above clear resistance levels; however, these strategies may fail frequently due to underlying market dynamics that favor stop hunting before major price moves.

• Significant price moves typically follow a stop hunt event that occurs just prior to delivery of important price changes—this pattern is observable across various timeframes and trading scenarios.

Practical Application in Trading

• On the last day of a weak week characterized by consolidation and downward breaks, traders caught offside will be targeted as algorithms aim for higher points where buy stops rest from earlier sellers.

• A larger pool of liquidity aligns with downtrends; many traders adjust their stop losses above recent highs after breaking below key lows—this behavior creates opportunities for further market manipulation by smart money players.

• Real-life examples illustrate how these concepts apply in practice; actual entries demonstrate how understanding liquidity pools can inform better trading decisions rather than relying solely on hindsight analysis.

Understanding Market Imbalances and Trading Strategies

The Importance of Short Time Frames in Trading

• Utilizing one, two, or three-minute charts is effective for identifying market imbalances, particularly in indices. These time frames provide clarity for high-frequency setups.

• High-frequency trading algorithms typically operate on intervals shorter than three minutes, often as brief as seconds. They focus on detecting small imbalances in the market.

Breaks in Market Structure

• When a short-term low is established and subsequently broken, it indicates a break in market structure. This is crucial for understanding potential price movements.

• In a bearish weekly market context, traders should look for specific signals before entering trades after breaking old highs to avoid premature actions.

Identifying Fair Value Gaps

• After identifying a break in market structure, traders should locate areas of imbalance (fair value gaps) where they can consider selling.

• Scaling down to lower time frames (e.g., from three minutes to one minute) can reveal additional opportunities within these identified gaps.

Algorithmic Influence on Markets

• The concept of an algorithm controlling price delivery suggests that markets are manipulated at every tick rather than purely driven by buying and selling pressure.

• Recognizing patterns over time simplifies execution; however, new traders must resist the impulse to act immediately upon seeing these patterns without sufficient backtesting.

Execution Strategy Post-Break

• Once a significant candle breaks down and subsequent candles trade higher into the identified gap, this presents an opportunity to sell short effectively.

Understanding Trading with Discount Brokers

The Role of Discount Brokers in Trading

• While having the initial margin to trade with a discount broker is beneficial, lacking the necessary skills to navigate the market can be detrimental.

• Many individuals promote the idea that using a discount broker guarantees profitability; however, success largely depends on one's knowledge and strategy rather than just access to discounted trading services.

Entry Strategies and Market Behavior

• After identifying a setup or entry point, traders should remain flexible; entering at various points close to the desired area is acceptable if prices move lower.

• Using market orders when prices are declining can increase risk due to potential slippage, making it crucial for traders to trust their short-selling strategies even when markets appear bullish.

Understanding Market Psychology

• Retail traders often seek confirmation before acting, which can lead them to miss opportunities; this behavior stems from a lack of understanding of price movements.

• Traders who place sell stops below market levels may find themselves at a disadvantage in consolidating markets, leading to losses if they do not understand market dynamics.

Liquidity Matrix and Market Ranges

• The liquidity matrix concept involves analyzing price ranges—specifically identifying highs and lows—to determine potential entry points for trades.

• By applying Fibonacci levels, traders can identify premium (above 50%) and discount (below 50%) zones within these ranges, guiding their trading decisions based on market sentiment.

Algorithmic Trading Insights

• Markets operating above the 50% level are considered premium; algorithms will typically aim for discounts during bearish trends.

• Even with significant buying pressure, algorithmic selling programs will drive prices lower regardless of buyer interest, illustrating how automated trading influences market dynamics.

Execution Strategy Considerations

• Observing execution patterns helps traders understand where entries and exits occur relative to key price levels.

• To exit short positions effectively, traders must buy back shares at favorable prices while being aware of resting sell stops that could impact their trades.

Imbalance Recognition in Price Movements

• Identifying imbalances between candles provides insights into potential price movements; recognizing these areas allows traders to anticipate future actions by algorithms aiming for efficient pricing.

Understanding Trading Decisions and Market Behavior

Reflections on Trading Performance

• The speaker reflects on their trading day, expressing regret for not maintaining a small position despite having an objective related to the daily low. They acknowledge that it's common to leave potential profits on the table.

• Emphasizes that traders will often make mistakes such as entering too early or holding positions too long, advising against self-blame for these occurrences.

Precision in Trading Strategies

• The speaker highlights the importance of recognizing patterns in price action, describing it as "amazing precision" which can lead to successful trades.

• Discusses a specific trade example where they entered at 14,800 and exited at the top of a defined range, illustrating how significant moves can be captured.

Risk Management and Trade Execution

• Questions the number of handles gained from trades, indicating that substantial profits (over 100 handles) are possible with effective strategies.

• Mentions the potential outcomes when using multiple futures contracts but acknowledges that success requires practice and experience.

Learning Through Practice

• Stresses the necessity of studying past price movements and utilizing tools like trading view's replay feature to understand market behavior better.

• Suggests focusing on specific time frames (e.g., 8:30 AM to 11:00 AM NY time), where setups are more likely to occur based on historical observations.

Key Elements for Successful Trading

• The speaker shares insights from their mentorship program about identifying liquidity runs (buy/sell stops), which are crucial for executing trades effectively.

• Describes how breaking market structure can signal entry points for shorting positions, emphasizing technical analysis fundamentals.

Practical Application of Strategies

• Encourages traders not to focus solely on small handle moves but rather develop skills that allow them to capture larger trends consistently.

Understanding Financial Strategies

The Importance of Personal Risk Assessment

• Individuals must assess their own risk when investing, as the speaker emphasizes personal discretion in financial decisions.

• The current economic climate is challenging globally, with job scarcity and financial hardship prompting the need for alternative income streams.

Homework Assignment: Analyzing E-Mini Futures Contracts

• Listeners are encouraged to review e-mini futures contract charts and utilize provided time frames for analysis.

• Newcomers to trading may find the pace fast; however, future lessons aim to clarify concepts and answer common questions.

Key Concepts in Technical Analysis

• Focus on intraday charts (less than daily), identifying breaks in market structure after liquidity pools.

• Traders should look for price movements above old highs or below old lows to determine potential market direction.

Trading Strategy Insights

• Once a break occurs, traders should identify imbalances as triggers for action, aiming for realistic targets rather than overly ambitious ones.

• Emphasis on "low hanging fruit" suggests that traders should prioritize achievable targets over speculative exits.

Future Learning and Application

• The homework involves logging observations from chart analysis to build a collection of setups that recur weekly.