Episode 6: Market Efficiency Paradigm and Institutional Order Flow

Key Concepts

• Internalizing Price Delivery:
  • Do not trade patterns or indicators for their own sake.
  • Enter longs where retail sells and shorts where retail buys.
  • Importance of thinking differently than retail traders, as the majority lose money.

Smart Money vs. Retail Trader

• Smart Money:
  • Focuses on liquidity and order flow rather than secret indicators.
  • Looks at time and price, especially the time of day which affects volatility.
• Retail Traders:
  • Generally lack discipline and understanding of market dynamics, often resulting in losses.

Market Efficiency Paradigm

• Price seeks opposing liquidity (buy/sell orders).
• Smart money aims to exploit the flaws in retail trading logic.
• Price delivery can be conceptualized through time-based charts.

Fair Value Gap (FVG)

• Bearish ICT Fair Value Gap:

  • Formation involves three candles:
    1. Candle 1: High
    2. Candle 2: Extended low below Candle 1
    3. Candle 3: Continuation candle that doesn’t retrace to Candle 1.
  • Identifies areas where price has not been efficiently offered to buyers.

• Bullish ICT Fair Value Gap:

  • Reverse of bearish FVG, identifying buy opportunities after a price run below an old low.

Displacement and Market Structure Shift

• Bearish Market Structure Shift:
  • Occurs when the market trades above an old high and then breaks down, indicating a potential short entry.
  • Look for energy in displacement (i.e., significant movement below the previous high).

Practical Application of Concepts

• Use a top-down approach:
  • Analyze higher time frames before drilling down to lower ones for trade entries.
  • Look for fair value gaps in conjunction with market structure shifts.
• Utilize timeframes to capture volatility around market news—example: employment data release at 8:30.

Trading Strategy

• Identify swing highs and lows, analyze for fair value gaps, and confirm through multiple timeframes.
• Use limit orders for entries and set stop losses based on recent swing highs/lows.
• Always perform backtesting and practice with demo accounts before live trading.

Conclusion

• Focus on understanding and internalizing the models discussed.
• Recognize that every trading day presents opportunities based on the principles outlined.
• Follow along with the ongoing mentorship for deeper insight and practical applications.