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ICT Mentorship Core Content - Month 03 - Market Maker Trap Head Shoulders Pattern
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ICT Mentorship Core Content - Month 03 - Market Maker Trap Head Shoulders Pattern

False Tops and Bottom Patterns in Classical Head and Shoulders

This section discusses the concept of false tops and bottom patterns in classical head and shoulders patterns. It explains how these patterns are formed, the significance of the neckline, and how to identify potential price targets.

Understanding Head and Shoulders Pattern

  • Head and shoulders pattern is characterized by a price high followed by a small retracement, then a higher high, and another retracement.
  • The three successive peaks in price form the neckline, which acts as a support/resistance level.
  • When the neckline is broken, it often leads to a pullback before further selling occurs.
  • Price targets can be determined by measuring the range from the neckline to the highest peak and subtracting it from the neckline.

Common Mistakes with Head and Shoulders Pattern

  • Retail traders often mistakenly look for head and shoulders patterns on lower time frames or at significant lows/highs.
  • These patterns are more commonly found at intermediate or long-term highs/lows.
  • Lack of understanding among retail traders leads to incorrect interpretation of these patterns.

Inverted Head and Shoulders Pattern

This section introduces inverted head and shoulders pattern as a false bottom pattern. It explains how this pattern differs from classical head and shoulders pattern, its formation process, and potential trading opportunities.

Inverted Head and Shoulders Pattern

  • Inverted head and shoulders pattern is characterized by a short-term low followed by a lower low, then a higher short-term low.
  • The three successive lower lows form the neckline.
  • If price trades above the neckline, it may lead to a pullback before advancing towards an upside target.

Avoiding Picking Tops and Bottoms

This section emphasizes the importance of avoiding the practice of picking tops and bottoms in trading. It explains why even seasoned professionals avoid this approach and suggests focusing on catching significant intermediate or short-term lows/highs instead.

Picking Tops and Bottoms

  • Picking tops and bottoms is a challenging game, even for experienced traders.
  • Retail traders often try to force textbook patterns into their charts, leading to poor profitability.
  • Seasoned professionals focus on catching significant intermediate or short-term lows/highs rather than attempting to pick tops and bottoms.

Capitalizing on False Patterns

This section discusses how institutional order flow studies can help identify false patterns in price charts. It highlights the opportunity to capitalize on these patterns when they appear contrary to market sentiment.

Identifying False Patterns

  • Institutional order flow studies provide insights into how interbank pricing works.
  • By understanding interbank pricing, traders can identify false patterns in price charts.
  • For example, a head and shoulders pattern may be viewed as a false top when the market is actually bullish.
  • Similarly, an inverted head and shoulders pattern may be seen as a bearish indication in a bearish market.

Trading Opportunities with Neckline Breakouts

This section focuses on trading opportunities that arise when neckline breakouts occur. It explains how to interpret neckline breakouts based on the overall market direction and suggests potential long or short positions accordingly.

Neckline Breakouts

  • When the neckline of a head and shoulders pattern is broken downwards, it presents an opportunity for long positions if the overall market direction is bullish.
  • Conversely, when an inverted head and shoulders pattern's neckline is broken upwards, it provides an opportunity for short positions if the overall market direction is bearish.

Head and Shoulders Pattern as a Buying Opportunity

The speaker discusses the head and shoulders pattern as a buying opportunity when it takes out two previous lows. They explain that they would buy and set stop orders below the equal lows or neckline. The objective is to pair up long exits with buy stops above the highest peak in the pattern.

  • The head and shoulders pattern can be seen as a buying opportunity when it breaks two previous lows.
  • Set stop orders below the equal lows or neckline.
  • Look for the highest peak to be violated to pair up long exits with buy stops above it.

Inverted Head and Shoulders Pattern as a Selling Scenario

The speaker explains that an inverted head and shoulders pattern can be seen as a selling scenario if price action indicates bearishness on higher time frames. They suggest looking for a lower low followed by a higher low, which would indicate an inverted head and shoulders pattern. Instead of expecting price to go higher, they anticipate a run on buy stops and look to go short.

  • An inverted head and shoulders pattern can be seen as a selling scenario if higher time frames indicate bearishness.
  • Look for a lower low followed by a higher low.
  • Anticipate a run on buy stops and consider going short.

Taking Profits at Right Shoulder

The speaker mentions that profits can be taken at the right shoulder of both regular head and shoulders patterns, as well as inverted ones. They emphasize the importance of considering recent price action when determining profit targets.

  • Consider taking profits at the right shoulder of both regular head and shoulders patterns, as well as inverted ones.
  • Recent price action should be considered when setting profit targets.

Example: British Pound USD Daily Chart

The speaker analyzes a daily chart of the British Pound USD (cable) and points out a down candle followed by an up move. They highlight the consolidation period and how price respected certain levels. They also discuss the concept of order blocks and their significance in identifying buying opportunities.

  • Analyzing a daily chart of the British Pound USD.
  • Noting a down candle followed by an up move.
  • Highlighting consolidation and price respecting certain levels.
  • Explaining the concept of order blocks and their significance in identifying buying opportunities.

Example: British Pound USD Hourly Chart

The speaker examines an hourly chart of the British Pound USD on August 12th. They identify a head and shoulders pattern with a higher high, lower high, and two equal lows. Retail traders may see this as a selling scenario, but the speaker explains that they expect prices to go higher based on institutional order flow analysis.

  • Examining an hourly chart of the British Pound USD on August 12th.
  • Identifying a head and shoulders pattern with specific characteristics.
  • Retail traders may interpret it as a selling scenario, but institutional order flow analysis suggests prices will go higher.

Buying Opportunity Below Equal Lows

The speaker discusses using head and shoulders patterns to identify buying opportunities below equal lows. They explain that when price runs below these lows, it presents an opportunity to buy sell stops from those who are already long. This creates liquidity in the market, which can be used to take profits at higher levels.

  • Head and shoulders patterns can be used to identify buying opportunities below equal lows.
  • Running below these lows allows for buying sell stops from those who are already long.
  • Liquidity created can be used to take profits at higher levels.

Objective Using Head and Shoulders Pattern

The speaker explains the objective of using the head and shoulders pattern against retail expectations. They discuss being a buyer at a certain level and looking for a move above a specific high as an objective. They emphasize that even small moves can be significant when considering the overall pattern.

  • Objective of using the head and shoulders pattern against retail expectations.
  • Being a buyer at a specific level and looking for a move above a certain high as an objective.
  • Emphasizing that even small moves can be significant in the context of the overall pattern.

Example: British Pound USD Daily Chart Outcome

The speaker revisits the daily chart example of the British Pound USD to show how it played out based on their analysis. They highlight the expansion that occurred, demonstrating how understanding institutional order flow can provide insights into market movements.

  • Revisiting the daily chart example of the British Pound USD.
  • Highlighting the expansion that occurred based on their analysis.
  • Demonstrating how understanding institutional order flow can provide insights into market movements.

Example: British Pound USD Daily Chart Order Block

The speaker examines another daily chart example of the British Pound USD, focusing on an up candle that closed in its range. They explain that this up candle targeted buy stops from previous equal highs, indicating it was a bullish order block used to break those stops.

  • Examining another daily chart example of the British Pound USD.
  • Focusing on an up candle that closed in its range.
  • Explaining how this up candle targeted buy stops from previous equal highs, indicating it was a bullish order block used to break those stops.

New Section

In this section, the speaker discusses an inverted head and shoulders pattern and how to draw the neckline on the chart.

Drawing the Inverted Head and Shoulders Pattern

  • The speaker explains that the pattern consists of a low, a lower low, and a higher low.
  • They mention that the neckline is drawn by connecting two levels on the chart.
  • Breaking above the neckline indicates a potential bullish move.

New Section

In this section, the speaker continues discussing the inverted head and shoulders pattern and identifies its neckline.

Identifying the Neckline

  • The speaker points out that the high on the chart represents where they will draw the inverted head and shoulders neckline.

New Section

In this section, the speaker explains how to measure from the low to the neckline once it is identified.

Measuring from Low to Neckline

  • The speaker mentions that measuring from the low up to the neckline provides an indication of potential price movement once it is broken.

New Section

In this section, the speaker discusses what happens when price trades above the neckline.

Price Trading Above Neckline

  • The speaker states that when price trades above the neckline, it indicates a breakout.
  • They explain that selling can be targeted below previous lows in anticipation of a sell-off.

New Section

In this section, the speaker emphasizes their perspective on trading breakouts above necklines in inverted head and shoulders patterns.

Selling Breakouts Above Neckline

  • The speaker advises against viewing breakouts above necklines as bullish signals for higher prices.
  • They suggest looking for opportunities to sell into buy stops placed above previous highs.

New Section

In this section, the speaker discusses their expectations for bearish price action and potential trading opportunities.

Expecting Bearish Price Action

  • The speaker expects to see bearish moves in the market.
  • They anticipate a potential sell-off below previous lows, providing trading opportunities.

New Section

In this section, the speaker analyzes a specific high on the chart and identifies potential selling points.

Analyzing Specific High

  • The speaker looks at a particular high on the chart and identifies it as a potential selling point.
  • They suggest using the low of the last up candle or the highest body of the candle as reference levels for selling.

New Section

In this section, the speaker discusses an inverted head and shoulders pattern formed on October 18th.

Identifying Inverted Head and Shoulders Pattern

  • The speaker points out that an inverted head and shoulders pattern was formed on October 18th.
  • They mention that breaking above the high of this pattern can be viewed as bullish by some traders but should be seen as bearish according to their perspective.

New Section

In this section, the speaker explains how to take advantage of buy stops placed above key levels in an inverted head and shoulders pattern.

Taking Advantage of Buy Stops

  • The speaker suggests being a seller when price trades above a specific level (5502).
  • They explain that buy stops placed above this level can be targeted for selling opportunities.

New Section

In this section, the speaker provides entry points for selling based on buy stops and neckline levels in an inverted head and shoulders pattern.

Entry Points for Selling

  • The speaker identifies a specific price level (5502) as an area for being bearish and selling.
  • They mention that the objective would be to cover positions below a certain low.

New Section

In this section, the speaker discusses profit opportunities and emphasizes the importance of looking for institutional overflow in determining market direction.

Profit Opportunities and Institutional Overflow

  • The speaker highlights multiple opportunities to cover positions and potentially make profits.
  • They emphasize the need to look for institutional overflow to justify a bearish market perspective.

New Section

In this section, the speaker explains how retail traders may interpret inverted head and shoulders patterns differently from their perspective.

Retail Traders' Interpretation

  • The speaker mentions that retail traders often view inverted head and shoulders patterns as bullish signals for upside moves.
  • They emphasize fading these patterns based on higher time frame analysis and institutional overflow.

New Section

In this section, the speaker concludes by mentioning their intention to address classical chart patterns favored by retail traders in future mentorship sessions.

Addressing Classical Chart Patterns

  • The speaker states that they will focus on debunking retail-minded classical chart patterns throughout their mentorship program.
Playlists: 2016 ICT Private Mentorship Core Content Month 03
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