Teachings from the ICT Mentorship for the month of December. I'm going to be teaching reinforcing liquidity pools, when to anticipate rates. Liquidity is the open interest of buyers and sellers in the market and can be further defined by those entities at or near specific price levels.
Now if we're looking at this graphic depiction on the left hand side, the gray area represents the current price. that you're looking at for your specific asset class. And we'll say, for instance, say this is the dollar index that we're looking at. If the current price is the market price, our understanding is that there's going to always be a participation in the marketplace by buyers and sellers. We don't always know why the interest would be on the form of buying or selling.
We're not really so concerned about what other traders are. trying to do with their trades but we are interested in knowing where their interest may reside in new pending orders. New pending orders are in the form of buy stops above the marketplace or usually more refined smart money traders will be selling above the market price. Below the market price typically you'll see sellers and usually it's the smart money that usually wants to buy below market price.
Usually it's the retail trader that is so reactive to price they're usually buying and selling at market price. The liquidity that we seek as a smart money minded trader is that we want to sell to the buyers above us or above the market price. So we want to be a seller above market price.
We want to buy below the market price from sellers that are willing to sell below the market price. And by having this understood, you're always going to be selling at a premium and buying at a discount. Now, this is going to be diametrically opposed to what retail is typically taught. They're usually taught to buy on a breakout or buy on some continuation pattern like a bull flag or... or a wedge of some kind.
What we require is the market pull back into a level of discount and that requires a bit of discipline and most traders, especially in the retail universe, lack discipline in terms of patience. When we view price, we look at where the market is presently. This is the market price. If we're looking at a bearish market, If the undertones of the marketplace suggest that the dollar is bearish, what we will be willing to do is we want to sell above old highs. Whereas the buyers that would view that move above an old high, they would see that as a bullish breakout.
So there's going to be willing buyers up there. So we know if price prints at an old high or just above an old high, there's going to be buyers that want to accumulate new longs up there. Or...
They have shorts on and the market has repriced above an old high and that's exactly where their stop loss for protective short position would be residing. In other words, they would have a protective buy stop above an old high. We could sell at that moment.
By doing that, what we're doing is we're actually selling short in a pool of liquidity of buyers. Above old highs, there's a pool or a collection of... orders that traders will build up around. Now, 90% of retail traders aren't even aware that other traders are doing what they're doing. Okay, they're just thinking myopically about themselves.
So what we do is we go into the marketplace and we role play by looking at the charts and say, okay, if I were short right now, where would my protective buy stop would be? If I was long right now, where would my protective Sell stop B. By doing that, you can get a good read on where other traders would have their stop loss orders above and below the marketplace. If we go back to an example and we suppose for a moment that the dollar index would be bearish, and I'm not stating that's the case now, but just for example purposes only, we're going to say the asset that we're looking at is the dollar index and we believe it's bearish.
We could wait for a rally. to go above an old high and look to go short there with the expectation that that move above an old high would be a false breakout and the market would be priced going lower to some lower level liquidity reference point in terms of maybe another old low that it would run below or a bullish order block or it could close in a fair value gap. Let's say for instance if the dollar was bullish we could look below the market price and see that there would be sellers on a breakout looking for a move lower because most retail traders are incorrect and that repricing would offer liquidity.
The market price and below, we want to be a buyer, so we're going to try to buy it at a discount. So we are trying to pair our buy orders with those willing participants that want to sell on a sell stop. They're either selling on a stop in the form of a breakout.
looking to make a move lower or they have a long on and they're protecting their long position with a protective sell stop. So when the market trades below an old low, we're going to view that as an opportunity to buy up the sell side liquidity to establish a long position and wait for a repricing for the market to trade above an old high so we can unload that position or trade up into a bearish order block, take profits or trade up into a fair value gap or a liquidity void. By viewing the marketplace in this market efficiency paradigm that I've been teaching you, it allows you to see the internals of the marketplace and you don't need to see a order block, you don't need to see a supposed ladder or anything like that, depth of market, you don't need any of that stuff.
You can actually see where the orders would be residing with common sense and just visual. reference to where the charts are showing old highs and old lows. The trick is knowing what the underlying pinnings of the market is.
Is the market predisposed to go higher or is it predisposed to go lower? Once you do that higher time frame work that leads you to be bullish or bearish on a specific asset class, then it's not hard to sit and wait. Well, it shouldn't be hard to say it like that. It will be hard for you initially because you're wanting to get in there and do something right now. But.
But when the market is predisposed to go higher, we wait for the market to go down below an old low to knock out those weak longs or bullish traders that trail their stop loss up too tight. The market will correct and go lower and take out an old low. That accumulation of sell side liquidity or knocking out the sell stops below the marketplace, it injects the marketplace with willing participants to sell the marketplace. So engineers liquidity into market.
So if there's a rush to sell to smart money and us, we look to accumulate that rush of selling interest. And we'll accumulate those orders really quick. And then we'll look for a move to go higher. And this is the opposite set for when the market's predisposed to go lower.
We wait for the market to trade above an own high. That buy side liquidity is injected in the marketplace. It's a rush of buy orders at the market. And smart money will go and accumulate and sell into that. with the expectation that false break above an old high while the market is underlying bearish, we are going to sell short in the form of a run on liquidity or a liquidity pool.
So what does this look like graphically? Okay, what we have here is a run on a bullish liquidity pool. And by definition, what that is, is the low that is under the current market price will typically have a trailed sell stop under it. for long traders. Once sell stops for traders who wish to trade on a breakout lower in price for a short position also reside below old lows.
Validation of this setup or condition is when the low is violated or price moves below the recent low and the sell stops become market orders to sell at market. This injects sell side liquidity into the marketplace and typically this is paired up with smart money buyers. Entry Techniques Using this concept when underlying market is bullish before price trades under the recent low you're going to place a buy limit order just below or at the recent low.
You're buying the sell stops like a bank trader or any other smart money entity would. Defining the risk with this setup, this is where your work is going to be. You're going to need to see the low, identify how far it could reasonably trade below it, and that's going to be taught.
A lot of detail is going to be taught to you across the next coming months because there's going to be things we look at that haven't been taught yet. But for exercise purposes now and to observe in past examples in hindsight in your charts, the low that you're trying to buy under, okay, you're going to expect or anticipate on a lower time frame chart like a 15 or 30 minute chart, you can expect a 10 to 20 pip sweep below the old low. A 30 to 50 pip stop is ideal if your entry is under the low and not above it.
So generally, if you're trying to get ahead of the move, trying to buy above the low or at the low, you're really probably just fearful you're going to miss the entry. It's better to wait for the market to trade under that low. And once it trades under there 10, 20 pips, that's a really good ideal entry point. Because if you use a 30 to 50 pip stop while entering below, significantly below the low, by 10 or 20 pips below the low, if you use a 30 or 50 pip stop at that point, it's going to take a real significant move to knock you out. And here's the thing.
If it starts moving beyond 25 pips, I think is a fair assessment, below the low, it's probably not just a stop run. You're probably looking at a much further decline. So when do we anticipate these stop rates? Well, in this case here, this market was on their lying bullish. It was the Kiwi, just so you know, it's a Kiwi dollar trade.
And there was an old low there. And the market had a liquidity pool resting below the old low. The market trades below that old low and accumulates all those sell stops. Now, while it's doing that, it's going to look to offset those new longs by smart money above old highs.
And you can see the equal highs over to the left where I've highlighted it and draw that out to the right side of the chart. And you can see where profit taken with buy stops when they're rated. And that's the other contrary liquidity pool. or where the buy stops would be resting. So you're accumulating sell stops and offloading them to buy stops.
You're accumulating the sell side liquidity for longs, and you're distributing your longs to the buy side liquidity. All you're doing is the same role as a market maker and a liquidity provider. Remember, it's that market efficiency paradigm just put into mechanics and operation.
So let's take a look at the charts themselves and we'll go over a couple of examples. Okay folks, we're looking at the Canadian dollar US CAD pair. On the left hand side we have a daily chart.
And I want you to take a look at the bodies of these candles over here. And we're going to look for a sweep below the bodies of those candles. Okay, there's south stops below these lows.
And we're using this previous day's candle low. And that low comes in at... 1.3102, 1.3102 and that's what that level is here and we transpose that level over onto our 15 minute time frame, 31.02.
And we see on this day here price trades down below it and shares a willingness to rally away and news is coming out and there's going to be an interest rate announcement on this particular day. And we're going to be looking for a run below this low here. Okay. So now we have a low.
And we now have another lower low right here that we're finding on an intraday basis. So we're going to be looking for a run below 130.95. 130.95.
So if we see a movement down to 130.85 or 130.75, we could be a buyer. So we can. do a buy at 130.90.
We're going to say that's our entry point. And price trades after watching a little bit. Here it trades up higher.
We're waiting. We're not considering anything above that level. We're looking for a move down below it.
Price trades right down below it here. And this candle's low comes in at 130.83. So the stop, I'm sorry, the limit order would have put you in long. at 130.90 and the actual low comes in at 130.83 so it's not even 7 pips, well it is 7 pips so draw down and price immediately shows a willingness to want to rally up And we're looking for a run up into this swing high where there would be a contrary liquidity pool where buy stops would be resting. So we're going to be looking for $133.60 as a way to unload.
And price rallies up. And there's your run to $133.60 there right here. So $133.60 occurs right here on this candle right here.
It still goes a little bit higher, but you can actually see it unfold here as well on the daily. So that's a liquidity pool example on the dollar-CAD pair. Really nice example of low risk entry.
Very big payout up to here. So let's go on to another example. OK, we're looking at the dollar index.
You see the dollar has been a bullish move here. And we probably cooled our jets for the week going into Friday. This is Thursday's trading.
And this is Friday's setup here. Price creates a low in here intraday and we have some buy stops above this high here and we have some buy stops above this short term high here as well. Price trades down, clears out the sell stops on the marketplace here and your entry could have been a 102.85 or 102.80.
The low comes in at 102.69. So you definitely would have had a easy fill on that in regards to spread. So below this low, you'd be long. And we're going to be looking for buy stops above these equal highs and then buy stops above here to unload that long position that would be accumulated below this low. Price rallies up.
Small little retracement. Could have been scary for you here, but you're looking for a rejection away. Price.
taps that high, just fell short of it, explodes up through, takes the buy stops, small lower tradesmen again, runs right up above, hits the buy stops, and this is what you see on Friday. And we talked about this in the market before it actually happened, running up there and buying, taking out these buy stops, and then seeking the sell stops below these relative equal lows. And you see that example as well.
So because the market was in a trending. environment prior to Friday and Friday being the end of the week. We're going to be looking for the market to want to take something off the table and going to have a choppy sideways day.
And that's why we weren't expecting a new high, but we were looking for a run on those buy stops and running out the sell stops. You can see an example again here with the dollar index. There's another example.
This is using the dollar Swissie. We're going to install a horizontal line delineating this low here. Okay, and we could be a buyer at that low or just below it and we're gonna look for a run below that to be a buyer and we're gonna look to pair orders above this high and this high here and we'll see and potentially look for a run up here. So 1 0 1 4 5 1 0 1 30 and 1 0 1 25 are our layered buy stop areas where we're going to be looking to take our profits and take something off the table.
Okay, so here's that move down into that that level we identified the low and here is the sweep down below it. Price rallies away, surges up above. for the 101.25s look at the reaction after it hits this so that in itself is a nice little reaction for a liquidity pool reaction but we're looking for a stronger move higher and there's your reaction clearing out the 101.30s and the 101.45s back here let's put a level on that so you can see it So it clears that and keeps on rolling. So another little run on liquidity pool there. Just another example.
Okay this is cable. We talked about this one also live in session Friday during live market action. Said that we would probably sweep below that one more time, get below the opening price, sweep the sell stops below that short term low here. And we talked about price moving up into the 125 to 125.20 level relative to the hourly chart. Price sweeps down below it, runs it.
pool of liquidity out here. So those stops are now gone. The sell stops are gone. So they accumulated those positions.
And now they're going to look to offset above 24.75. And on the hourly, we talked about this. And you can look at the live session recording for December 16, 2016, for that bit of business.
Because we're not going to talk about fair value gaps there today. But price runs up. It hits that level handsomely.
So run on liquidity pool here, absorb the sell stops, accumulate them as long position entries, take something off above here and then off up here relative to the hourly chart. So there's a few examples of runs on liquidity in the form of a liquidity pool. We're going to build on these ideas also on supplementary teachings.
during the week of Christmas because there will not be any live sessions that week because of the holiday I'll be with my family. I will be providing you five additional pre-recorded teachings that go into more detail about these liquidity pool runs, fair value gaps, liquidity voids, order blocks, mitigation blocks, and reclaim the order blocks. So there's your teachings.
There's going to be an amplification of what you're getting in the regular 8 teachings for December 2016. So until the next one, I wish you good luck and good trading.