Fundamentals of ICT Trading Strategies

Welcome to the Ultimate Beginner's Guide to ICT Trading Concepts. This video is a summary of the foundational concepts found in the ICT method, neatly organized for your convenience, since the method is quite nuanced and can be overwhelming to some people in the beginning. Without further ado, let's begin talking about swing points and the idea of liquidity. The very first thing we need to understand is the idea of swing points and their relation to liquidity. Swing points are either swing lows or swing highs. To identify swing points, we need three candles. In a swing high, the candle in the center has a lower high to the left and a lower high to the right. In a swing low, the candle in the center has a higher low to the left and a higher low to the right. The reason the idea of swing points is important is because many retail traders place top orders just above swing highs or just below swing lows. meaning that liquidity is deeper in these areas. Recall that in a long trade, the stop loss and the take profit targets are sell orders. And in a short trade, the stop loss and take profit targets are buy orders. This idea leads us directly to the concept of buy side and sell side liquidity. Just above a swing high, there are a lot of stop orders from short trades, which are buy stop orders. And there are also a lot of buy stop orders from traders who want to go long. if price surpasses the swing high. In ICT terms, this level represents buy-side liquidity. Just below a swing low, there are a lot of stop-loss orders from long trades, which are sell-stop orders, and there are also a lot of sell-stop orders from traders who want to go short if price surpasses the swing low. In ICT terms, this level represents sell-side liquidity. The identification of buy-side and sell-side liquidity levels is important in many ways in the ICT method. Let's move on to a real price chart and observe examples of buy side and sell side liquidity levels. In this 5 minute chart of the mini S&P, we currently have a low. This is a potential swing low because the candle to the left has a higher low. If the next candle produces a higher low, the current candle will be classified as a swing low, which represents a point of sell side liquidity. Moving forward one candle we can see a higher low, so we can go ahead and classify this low as a swing low. While we were paying attention to the swing low, notice that we also have the potential for a swing high in this candle. That's because the candle to the left has a lower high. If the next candle also produces a lower high, this point will be classified as a swing high or buy side liquidity. Moving one candle to the future, we can see that this is exactly what happens, so we can go ahead and mark. this as a swing high. Right now we also have the potential to another swing low. If the next candle produces a higher low, we'll have another swing low at this point. Going forward one candle we can see that it doesn't happen. The new candle forms a lower low. Now this new candle is a potential candidate for a swing low because it has a higher low to its left. In the next candle we can see that a new swing low forms. So we can go ahead and mark it out. In the next two candles, we can see that price takes out the last swing high and comes back to test it on the other side as support. Over the next four candles, we can see that only higher highs and higher lows are formed. Eventually, price produces a candle with a lower high and renders the previous high as a swing high or buy side liquidity, so we can go ahead and mark it out. In the next candle, price continues to the downside. Identifying swing points is very simple. but it's a good idea to practice it in replay mode or real time so it becomes second nature to you. Once we start to mark swing points in real price charts, it becomes clear that certain swing points cluster together while others remain isolated giving rise to two distinct definitions of highs and lows called equal highs and lows and old highs and lows. In this chart we can see an example of equal highs. Notice how three swing highs cluster together roughly in the same level. Still in the same chart, we can spot an example of equal lows. In this case, three swing lows cluster to form equal lows. Notice that equal highs and lows don't necessarily happen in the same price level perfectly. They simply cluster together in the same area, roughly speaking. Still in the same chart, we can see the concept of old highs and old lows, which are swing highs and lows that stand out or that are isolated in a way. Notice that in an example of the old low, Price pierces the old low without closing below it, and then it starts to go up. That's an important idea not only in ICT's method, but in the overall idea of market manipulation, meaning the triggering of liquidity in order to deceptively induce retail traders to one side of the market. Still on the topic of highs and lows, we can look at other important types of highs and lows in any price chart, namely the previous week high or low, previous day high or low, sessions high or low, or even intraday time frame highs and lows. We'll take another look at that when we talk about the concept of daily bias. Another important concept in the ICT method is the idea of discount and premium zones. To understand that, we must first understand the idea of range, which is simply the space between a swing low to a swing high, or the space between a swing high to a swing low. Let's take the example of the range from a swing low to a swing high for the sake of illustration first. To define the premium and discount zones, we divide the range in two equal parts. The upper zone is always called premium and the lower zone is always called discount. That's also the case when the range comes from a swing high to a swing low, which would be a downward price movement. Whenever we look for long trade opportunities, we want to enter trades in the discount zone, assuming there are other elements to support the trade idea. The lower into discount, the greater the risk-reward ratio if we place a stop below the swing low and a target at the swing high. For downward price movements, we measure a range from a swing high to a swing low. We want to get into short trades in the premium zone. The higher into the premium zone the better, because we are able to extract a greater risk-reward ratio, assuming the stop loss is at the swing high and the target is at the swing low. This notion of discount and premium is very simple, but it's something you need to keep in mind when we look at other concepts like optimal trade entries, fair value gaps, order blocks and the combination of elements that will generate trade setups. Directly related to the idea of premium and discount zones we have the concept of OTE, which is short for optimal trade entry. The OTE is a specific Fibonacci retracement zone that will fall in the discount zone for a long trade entry or in the premium zone for a short trade entry. This specific Fibonacci retracement zone is from 0.62 to 0.79. The midpoint of this zone, which is 0.705, is also highlighted. In this illustration, you can see the OTE for a long trade. Notice how the zone falls into the discount zone. It's important to observe how price action reacts to the three levels of this zone, especially the midpoint at 0.705 retracement level. In this other illustration, you can see the OTE for a short trade. Notice how the zone falls into the premium zone. It's important to observe how price action reacts to the three levels of this zone, especially the midpoint retracement level, just like in the case of an OTE for a long trade. Let's take a look at a couple of examples of how the OTE works in real price charts. Here you can see the 4-hour chart of the EURUSD. I already marked out an important swing high and a swing low. Let's now mark out the discount and premium zones generated by this range. Recall that a range is the distance between a swing high and a swing low. Let's also mark out the OTE or optimal trade entry for this range. Notice how the OTE falls into the premium zone. If price comes back to that level, we want to observe the interaction of price with each of the three levels that compose the OTE zone. By moving forward a few candles, we can see that price reacts to the 0.62 level of the OTE. Although you can use this as an entry, Keep in mind that the higher into premium you get, the greater the risk-reward ratio you'll extract from the trade. In this next chart, we can see that price reacts a little to the downside, but then returns back up to the OTE, closing above the midpoint, but still below the 0.79 level. In the very next candle, the market drops significantly. It takes just one more candle for price to reach the swing low target. If a short trade was triggered at the midpoint, of the OTE would stop at the swing high and a target at the swing low, the trade would have a 2.4 risk-reward ratio. In this final image, we can see that price continued going down afterwards. So even though a 2.4 risk-reward ratio is not terrible, there was a lot more that could be extracted from this trade. Let's take a look at a long trade example using the OTE. Here you can see that price just made a swing high. Let's first draw the discount and premium zones, and then plot the OT using the range outline in the chart. In this next chart, we can see that price returns to the OTE into discount and reacts to the lowest level of the zone by touching it without closing below it. Right after, price begins to rise in the direction of the old high, swing high, or buy-side liquidity level. One major concept in the ICT method is the fair value gap. The fair value gap is a three-candle pattern that hides a gap between the first and third candle's shadows. Let's first take a look at the bullish fair value gap, which is often called BC. BC simply stands for buy side in balance and sell side in efficiency. The bullish fair value gap is a pattern where the upper shadow of the first candle doesn't overlap with the lower shadow of the third candle, creating a gap between the two. Let's make a quick comparison between price movements where we can find a fair value gap and one where we cannot. On the left we can see that there is no overlap. between the upper shadow of the first candle and the lower shadow of the third candle, therefore creating a fair value gap. On the right, we can see that the upper shadow of the first candle overlaps with the lower shadow of the third candle. In this case, there is no fair value gap. The bearish fair value gap is often called CB, which stands for sell-side imbalance and buy-side inefficiency. The bearish fair value gap is a pattern where the lower shadow of the first candle doesn't overlap. with the upper shadow of the third candle, creating a gap between the two. Let's make a quick comparison between three candle patterns where we can find a fair value gap and one where we cannot. On the left we can see that there is no overlap between the lower shadow of the first candle and the upper shadow of the third candle, therefore creating a fair value gap. On the right we can see that the lower shadow of the first candle overlaps with the upper shadow of the third candle. In this case there is no fair value gap. Another important detail about fair value gaps is the idea of consequent encroachment, which is simply a fancy expression that means the midpoint of the fair value gap or the 50% retracement of the gap. Fair value gaps can be used as zones of support and resistance. As is the case with many other types of support and resistance, it's important to pay attention to how price reacts to fair value gap limits and the consequent encroachment line. Let's look at BCs or bullish fair value gaps first. The ideal scenario is to see price reacting to the upper limit of the fair value gap, meaning piercing it and closing above it. That's one way of knowing that price is respecting the fair value gap. Another valid way is to observe the same type of reaction at the consequent encroachment. Price will pierce the midpoint of the fair value gap and close above it, quite often testing the consequent encroachment again. right after it, although that is certainly not a requirement. In this other illustration, you can see the bearish version of the fair value gap reversal. The principle is the same, of course, but everything is flipped upside down. As it is the case with other types of support and resistance, price can disrespect the fair value gap and test it on the other side. In ICT terms, this is called a fair value gap inversion. Here on the left, you can see a hypothetical example of the bullish fair value gap inversion. leading to a bearish movement. And on the right, you can see a bearish fair value gap inversion leading to a bullish movement. Once again, this is exactly like the old switch and test of various kinds of support and resistance lines. Beyond fair value gaps, ICT's method also points to other types of related concepts, namely volume imbalances and gaps. A volume imbalance happens when there is a gap between the open and close of adjacent candles. although there is trading activity within the gaps since candle shadows overlap. A gap occurs when there is a space between highs and lows of adjacent candles, meaning there is no trading activity between the high of the first candle and the low of the second candle in the case of a bullish gap, or the low of the first candle and the high of the second candle in the case of a bearish gap. In this illustration you can see the bullish version of the fair value gap, volume imbalance, and gaps side by side for comparison. In this other illustration we have the bearish version of all three patterns. Keep in mind that you can use fair value gaps, volume imbalances, and gaps in a similar way. Let's now observe some real examples of fair value gaps, volume imbalances, and gaps starting with a very simple example. We begin with this one hour chart of the dollar index. Moving one candle to the future, we can spot the formation of a fair value gap, since the upper shadow of this candle does not overlap with the lower shadow of the current candle. It's not uncommon for price to return to the fair value gap and then continue its main trajectory, although this is not the only use of fair value gaps. Moving one candle forward, we can see that price enters the fair value gap area, and then immediately reverses to the upside continuing its main movement. Notice here that if the lower shadow of the next candle does not overlap with the upper shadow of this candle, we'll have a new fair value gap. In the next candle, we can see that this is exactly what happens. Another fair value gap is created. In the next candle, we can see an inside bar formation, but without entering the latest fair value gap. In the next candle, price enters the fair value gap and closes above it, clearly reacting to that zone in a similar way it did with the previous fair value gap. After that, price resumes its movement to the upside for a few more candles. If we move one more candle to the future, we'll observe the formation of a gap as you can see in this chart. We can mark it out in the same way that was done with the fair value gaps. The principle here is the same. This is an area that price can come back to and reverse. We can also observe inversions in some cases. In the very next candle, we can see price reacting to the gap in a similar way it did with the previous fair value gap. In this chart, we can see how price continued going up after reacting to the upward gap. Notice also that the current candle is reacting to a fair value gap that was formed right after the upward gap. Still in the dollar index, but this time in the 4-hour chart, we can see an example of volume imbalance. Notice there is a gap between the close of the previous candle and the open of the current candle, but there is also trading activity between the gap, which makes this a volume imbalance. In the next few candles, we can see how the volume imbalance can hold price and eventually the market starts to rise from there. Another important idea in the ICT method is called order block. There are a couple of different ways of using order blocks. Let's divide these two ways into large body candles, which are often referred to as high probability order blocks, and small body candles with more prominent chattels, which are often referred to as low probability order blocks. Let's explore the high probability order block first. The bullish variation of an order block is formed by the large-bodied bearish candle or series of large-bodied bearish candles that sweep sell-side liquidity and then lead to a break of a node high right after it, which in this case is called a break of structure. The order block occurs at the open of the large-bodied bearish candle that sweeps sell-side liquidity. Price will often retrace back to the order block before moving higher. The bearish variation of an order block is formed by the large-bodied bullish candle or series of large body bullish candles that sweep buy side liquidity and then lead to a break of an old low right after it, which in this case is called break of structure. The order block occurs at the open of the large body bullish candle that sweeps buy side liquidity. Price will often retrace back to the order block before moving lower. Notice that high probability order blocks come from simple expanding pivot formations where a lower low is followed by a higher high in the case of a bullish order block, or when a higher high is followed by a lower low in the case of a bearish order block. We also have the low probability order blocks, which are formed by small body candles with more prominent shadows occurring in the middle of a single price movement. These can also be divided into their bullish and bearish variations. In the bullish variation of a low probability order block, we find a small body bearish candle in the middle of a price movement composed by mostly bullish candles. The order block sits in the space between the high and the open of the small body bearish candle. Price will often retrace to this order block before resuming the movement upwards. In the bearish variation of a low probability order block we find a small body bullish candle in the middle of a price movement composed by mostly bearish candles. The order block sits in the space between the low and the open of the small body bullish candle. Price will often retrace to this order block before resuming the movement downwards. Let's take a look at an example of a high probability bullish order block in a real price chart. In this chart you can see that I marked out the latest swing low highlighting a sell side liquidity level. Recall that in a bullish high probability order block, you must identify the sweep of sell side liquidity first. In this next chart, we can see that sell side liquidity is swept by a large body bearish candle. Notice also that the upper tail of the previous candle forms a swing height. We want price to break this latest swing high. That would be the very next step for us to use an order block in this case. Moving price forward a few candles we can identify a break of structure. Meaning that price rises and breaks the latest swing high. In summary, we swept the sell side liquidity and failed to move down after it. Price comes back up and breaks market structure. This is a setup for a high probability order block. In this case, the order block sits in the opening price of the large body bearish candle that swept sell side liquidity. Price will often retrace back to the order block, as you can see here, which would be the long trade setup, and then price goes to the upside as expected, as you can see in this final chart. There are a couple of important details in here. Notice that price touches the order block two times before going to the upside, which would be the opportunity for a secondary entry. in case you missed the first touch. Beyond that we can also see a low probability bullish order block working as you can see in this area. A small bodied bearish candle in the middle of a bullish movement where we mark the distance between the high and the open. Observe how price action comes back to this area right after and goes up from there. Let's move on now to a real example of a high probability bearish order block where we use another type of entry called mean threshold instead of using the opening price. of a large body bullish candle as the order block. In this chart I marked out the buy side liquidity level and we can see price approaching that level. This is the moment you begin to anticipate a liquidity sweep. In this next chart you can see that price sweeps buy side liquidity and then fails to move higher. Notice also that a new swing low just formed, so if price breaks it to the downside we can look for an order block setup, this time looking for the mean threshold of the order block. In this situation the order block is the large body bullish candle that leads to the liquidity sweep. The mean threshold is the 50% Fibonacci retracement from the open to the close of that candle as you can see here. In this next chart we can see price breaking the last swing low. The setup now consists in waiting for price to retrace back to the mean threshold of the order block. Advancing a few candles into the future we can see price retracing back up and meeting the mean threshold and right after that price goes down completing the bearish order block setup. An interesting detail here is that we can spot that a low probability order block formed in the same level of the mean threshold of the high probability order block. As is the case with any method the trader must find the intersection of techniques in order to find the best trades. The final ICT concept we'll study in this beginner's guide is the daily bias. The daily bias is exactly what it sounds like. It's a way to determine if the next day will be bullish or bearish. We can determine that in a very simple way using the previous day's high and low and the observation of what price does at these extremes. Let's look at the basic idea of the bullish daily bias. Let's say you begin with this candle and you mark out the high and low of the day. In the next candle, price breaks and closes above the previous day's high. That would generate a bullish bias for the next day. Another example of bullish bias is when price fails to move below the previous day's low, like so. Notice that price breaks the low, but it cannot close lower. In the second case, we can expect the next day to be bullish or at least the high to be met. In the case of a bearish daily bias, the rationale is the same. If price breaks and closes below the previous day's low, we have a bearish bias for the next day. If price breaks and fails to close above the previous day's high, we also have a bearish bias for the next day. In the second case, we can expect the next day to be bearish or at least to reach the previous day's low. This concept, like many others, is better understood in practice. So let's take the daily chart of the dollar index to see how this works. Let's say we begin with this current candle. The first step is to mark out the high and low. We'll go on to the next candle. we can see that it broke and closed below the previous day's low. So we have a bearish bias for the next day. We mark out the current high and low. Two things can happen in the next candle. We should see price reaching this low, which in this case is very close to the current price, or we should see price break this low and close below it. In the next day, we can see that our bearish bias was correct. And since price closed below the previous day's low, we continue with the bearish bias for the next day. Now I mark out the new high and low. You should see price breaking to the downside or at least reaching the new low. In the next candle we can see that our bias was correct. Since price closed below the previous day's low, we continue with a bearish bias. We now mark the new high and low. Price is expected to at least reach the new low or break and close below it. In the next candle we can see that price moves sharply to the downside, once again confirming the daily bearish bias that was anticipated in the previous day. We now mark the new high and low. Once again, we expect price to reach the new low. or break and close below it. In the next candle we can see that the bearish bias was correct and we mark out the new high and low. In the next candle we can see something new happening. Notice that we did reach the previous day's low as expected. We broke the previous day's low but we closed back up into the range. This generates a bullish bias for the next day. We now mark the new high and low. In other words, we should see a bullish candle surpassing the previous day's high where it leads price reaching the previous day's high. In the next candle we see price reaching the previous day's high as expected, but a bearish candle appears, so our bias was wrong in a way, but it was correct about reaching the previous day's high. Notice also that we broke the previous day's high and failed to close above it. This generates a bearish bias for the next day. We must also update the high and low to the current candle. Since the bias now is bearish, we expect price to at least reach this low or break and close below it. In the next candle we can see that price does reach the previous day's low but failed to close below it generating a bullish bias for the next day. Before moving on we must update the high and low to the current day. Now we have a bullish bias for the next day so we should see price at least reaching the previous day's high or producing a bullish candle that surpasses that high. In the next candle We see that price did reach the previous day's high and surpassed it, creating a bullish daily bias for the next day. Before moving on, we update the new high and low. Once again, we should see price at least reach the previous day's high or surpass the previous day's high in a bullish daily bias. In the next candle, we not only reached the previous day's high, but we also surpassed it, creating a new bullish bias. Now we update the new high and low. We expect price to at least reach the previous day's high. previous day's high or surpass it and close above it. In the next day we close above the previous day's high creating a bullish daily bias for the next day and now we update the new high and low expecting price to at least reach the previous day's high. The next day we see price closed above the previous day's high generating a new bullish daily bias for the next day updating the new high and low we expect price to at least reach the new high in the next day. In the next candle we did reach the previous day's high, but price failed to close above it. That generates a bearish bias for the next day. Updating the new high and low, we expect price to at least reach the previous day's low now. The next day, price not only reached the previous day's low, but it also closed below it, generating a new bearish bias for the next day. Updating the new high and low, we now expect price to at least reach the previous day's low. The next day, we see that price indeed reached the previous day's low and then created a bullish candle that closed above the previous day's high. By the way, notice how price reversed at a fair value gap in here. Now we have a bullish bias for the next day. Updating the new high and low, we expect price to at least reach this high the next day. Moving one candle to the future, we see that price did reach the previous day's high, but failed to close above it, therefore generating a bearish bias for the next day. Updating the high and low, we now expect price to at least reach the previous day's low. The next day we have an inside bar, so we failed to reach the previous day's low, and we don't have a bias for the next day. Now we can update the new high and low and see what happens. The next day we close above the previous day's high, generating a bullish bias for the next day. Updating the new high and low, we expect price to at least reach the new high in the next day. Moving forward, we can see that we did reach the previous day's high and close above it. I guess you can get the idea of how this works by now. In all these candles, the bias only failed to meet its condition once, when the inside bar appeared. In other words, it worked most of the time. This idea of the daily bias can also be used in intraday charts. The principle is exactly the same. The daily bias can be used to frame a trade in a lower time frame as well. This finishes this beginner's guide to the ICT method. The ICT method goes much further than this. but these are the foundational concepts you can incorporate in your trading right away. If you want to go deeper into it, you can visit ICT's channel in the video description. That's it for this video. If you enjoyed it, please help support the ongoing creation of free videos like this one by clicking the like button, subscribing to the channel, activating the notifications, leaving your feedback in the comment section, and sharing this video with your trading community. Thank you very much for watching and I hope to see you. in the next videos. Take care.

The very first thing we need to understand is the idea of swing points and their relation to liquidity. Swing points are either swing lows or swing highs. To identify swing points, we need three candles.

In a swing high, the candle in the center has a lower high to the left and a lower high to the right. In a swing low, the candle in the center has a higher low to the left and a higher low to the right. The reason the idea of swing points is important is because many retail traders place top orders just above swing highs or just below swing lows. meaning that liquidity is deeper in these areas.

Recall that in a long trade, the stop loss and the take profit targets are sell orders. And in a short trade, the stop loss and take profit targets are buy orders. This idea leads us directly to the concept of buy side and sell side liquidity.

Just above a swing high, there are a lot of stop orders from short trades, which are buy stop orders. And there are also a lot of buy stop orders from traders who want to go long. if price surpasses the swing high. In ICT terms, this level represents buy-side liquidity.

Just below a swing low, there are a lot of stop-loss orders from long trades, which are sell-stop orders, and there are also a lot of sell-stop orders from traders who want to go short if price surpasses the swing low. In ICT terms, this level represents sell-side liquidity. The identification of buy-side and sell-side liquidity levels is important in many ways in the ICT method. Let's move on to a real price chart and observe examples of buy side and sell side liquidity levels.

In this 5 minute chart of the mini S&P, we currently have a low. This is a potential swing low because the candle to the left has a higher low. If the next candle produces a higher low, the current candle will be classified as a swing low, which represents a point of sell side liquidity. Moving forward one candle we can see a higher low, so we can go ahead and classify this low as a swing low. While we were paying attention to the swing low, notice that we also have the potential for a swing high in this candle.

That's because the candle to the left has a lower high. If the next candle also produces a lower high, this point will be classified as a swing high or buy side liquidity. Moving one candle to the future, we can see that this is exactly what happens, so we can go ahead and mark.

this as a swing high. Right now we also have the potential to another swing low. If the next candle produces a higher low, we'll have another swing low at this point.

Going forward one candle we can see that it doesn't happen. The new candle forms a lower low. Now this new candle is a potential candidate for a swing low because it has a higher low to its left. In the next candle we can see that a new swing low forms. So we can go ahead and mark it out.

In the next two candles, we can see that price takes out the last swing high and comes back to test it on the other side as support. Over the next four candles, we can see that only higher highs and higher lows are formed. Eventually, price produces a candle with a lower high and renders the previous high as a swing high or buy side liquidity, so we can go ahead and mark it out.

In the next candle, price continues to the downside. Identifying swing points is very simple. but it's a good idea to practice it in replay mode or real time so it becomes second nature to you.

Once we start to mark swing points in real price charts, it becomes clear that certain swing points cluster together while others remain isolated giving rise to two distinct definitions of highs and lows called equal highs and lows and old highs and lows. In this chart we can see an example of equal highs. Notice how three swing highs cluster together roughly in the same level. Still in the same chart, we can spot an example of equal lows.

In this case, three swing lows cluster to form equal lows. Notice that equal highs and lows don't necessarily happen in the same price level perfectly. They simply cluster together in the same area, roughly speaking. Still in the same chart, we can see the concept of old highs and old lows, which are swing highs and lows that stand out or that are isolated in a way. Notice that in an example of the old low, Price pierces the old low without closing below it, and then it starts to go up.

That's an important idea not only in ICT's method, but in the overall idea of market manipulation, meaning the triggering of liquidity in order to deceptively induce retail traders to one side of the market. Still on the topic of highs and lows, we can look at other important types of highs and lows in any price chart, namely the previous week high or low, previous day high or low, sessions high or low, or even intraday time frame highs and lows. We'll take another look at that when we talk about the concept of daily bias.

Another important concept in the ICT method is the idea of discount and premium zones. To understand that, we must first understand the idea of range, which is simply the space between a swing low to a swing high, or the space between a swing high to a swing low. Let's take the example of the range from a swing low to a swing high for the sake of illustration first. To define the premium and discount zones, we divide the range in two equal parts.

The upper zone is always called premium and the lower zone is always called discount. That's also the case when the range comes from a swing high to a swing low, which would be a downward price movement. Whenever we look for long trade opportunities, we want to enter trades in the discount zone, assuming there are other elements to support the trade idea. The lower into discount, the greater the risk-reward ratio if we place a stop below the swing low and a target at the swing high.

For downward price movements, we measure a range from a swing high to a swing low. We want to get into short trades in the premium zone. The higher into the premium zone the better, because we are able to extract a greater risk-reward ratio, assuming the stop loss is at the swing high and the target is at the swing low.

This notion of discount and premium is very simple, but it's something you need to keep in mind when we look at other concepts like optimal trade entries, fair value gaps, order blocks and the combination of elements that will generate trade setups. Directly related to the idea of premium and discount zones we have the concept of OTE, which is short for optimal trade entry. The OTE is a specific Fibonacci retracement zone that will fall in the discount zone for a long trade entry or in the premium zone for a short trade entry.

This specific Fibonacci retracement zone is from 0.62 to 0.79. The midpoint of this zone, which is 0.705, is also highlighted. In this illustration, you can see the OTE for a long trade.

Notice how the zone falls into the discount zone. It's important to observe how price action reacts to the three levels of this zone, especially the midpoint at 0.705 retracement level. In this other illustration, you can see the OTE for a short trade.

Notice how the zone falls into the premium zone. It's important to observe how price action reacts to the three levels of this zone, especially the midpoint retracement level, just like in the case of an OTE for a long trade. Let's take a look at a couple of examples of how the OTE works in real price charts. Here you can see the 4-hour chart of the EURUSD.

I already marked out an important swing high and a swing low. Let's now mark out the discount and premium zones generated by this range. Recall that a range is the distance between a swing high and a swing low. Let's also mark out the OTE or optimal trade entry for this range.

Notice how the OTE falls into the premium zone. If price comes back to that level, we want to observe the interaction of price with each of the three levels that compose the OTE zone. By moving forward a few candles, we can see that price reacts to the 0.62 level of the OTE. Although you can use this as an entry, Keep in mind that the higher into premium you get, the greater the risk-reward ratio you'll extract from the trade.

In this next chart, we can see that price reacts a little to the downside, but then returns back up to the OTE, closing above the midpoint, but still below the 0.79 level. In the very next candle, the market drops significantly. It takes just one more candle for price to reach the swing low target.

If a short trade was triggered at the midpoint, of the OTE would stop at the swing high and a target at the swing low, the trade would have a 2.4 risk-reward ratio. In this final image, we can see that price continued going down afterwards. So even though a 2.4 risk-reward ratio is not terrible, there was a lot more that could be extracted from this trade. Let's take a look at a long trade example using the OTE.

Here you can see that price just made a swing high. Let's first draw the discount and premium zones, and then plot the OT using the range outline in the chart. In this next chart, we can see that price returns to the OTE into discount and reacts to the lowest level of the zone by touching it without closing below it. Right after, price begins to rise in the direction of the old high, swing high, or buy-side liquidity level. One major concept in the ICT method is the fair value gap.

The fair value gap is a three-candle pattern that hides a gap between the first and third candle's shadows. Let's first take a look at the bullish fair value gap, which is often called BC. BC simply stands for buy side in balance and sell side in efficiency.

The bullish fair value gap is a pattern where the upper shadow of the first candle doesn't overlap with the lower shadow of the third candle, creating a gap between the two. Let's make a quick comparison between price movements where we can find a fair value gap and one where we cannot. On the left we can see that there is no overlap. between the upper shadow of the first candle and the lower shadow of the third candle, therefore creating a fair value gap.

On the right, we can see that the upper shadow of the first candle overlaps with the lower shadow of the third candle. In this case, there is no fair value gap. The bearish fair value gap is often called CB, which stands for sell-side imbalance and buy-side inefficiency.

The bearish fair value gap is a pattern where the lower shadow of the first candle doesn't overlap. with the upper shadow of the third candle, creating a gap between the two. Let's make a quick comparison between three candle patterns where we can find a fair value gap and one where we cannot.

On the left we can see that there is no overlap between the lower shadow of the first candle and the upper shadow of the third candle, therefore creating a fair value gap. On the right we can see that the lower shadow of the first candle overlaps with the upper shadow of the third candle. In this case there is no fair value gap. Another important detail about fair value gaps is the idea of consequent encroachment, which is simply a fancy expression that means the midpoint of the fair value gap or the 50% retracement of the gap.

Fair value gaps can be used as zones of support and resistance. As is the case with many other types of support and resistance, it's important to pay attention to how price reacts to fair value gap limits and the consequent encroachment line. Let's look at BCs or bullish fair value gaps first. The ideal scenario is to see price reacting to the upper limit of the fair value gap, meaning piercing it and closing above it. That's one way of knowing that price is respecting the fair value gap.

Another valid way is to observe the same type of reaction at the consequent encroachment. Price will pierce the midpoint of the fair value gap and close above it, quite often testing the consequent encroachment again. right after it, although that is certainly not a requirement.

In this other illustration, you can see the bearish version of the fair value gap reversal. The principle is the same, of course, but everything is flipped upside down. As it is the case with other types of support and resistance, price can disrespect the fair value gap and test it on the other side.

In ICT terms, this is called a fair value gap inversion. Here on the left, you can see a hypothetical example of the bullish fair value gap inversion. leading to a bearish movement. And on the right, you can see a bearish fair value gap inversion leading to a bullish movement.

Once again, this is exactly like the old switch and test of various kinds of support and resistance lines. Beyond fair value gaps, ICT's method also points to other types of related concepts, namely volume imbalances and gaps. A volume imbalance happens when there is a gap between the open and close of adjacent candles.

although there is trading activity within the gaps since candle shadows overlap. A gap occurs when there is a space between highs and lows of adjacent candles, meaning there is no trading activity between the high of the first candle and the low of the second candle in the case of a bullish gap, or the low of the first candle and the high of the second candle in the case of a bearish gap. In this illustration you can see the bullish version of the fair value gap, volume imbalance, and gaps side by side for comparison.

In this other illustration we have the bearish version of all three patterns. Keep in mind that you can use fair value gaps, volume imbalances, and gaps in a similar way. Let's now observe some real examples of fair value gaps, volume imbalances, and gaps starting with a very simple example.

We begin with this one hour chart of the dollar index. Moving one candle to the future, we can spot the formation of a fair value gap, since the upper shadow of this candle does not overlap with the lower shadow of the current candle. It's not uncommon for price to return to the fair value gap and then continue its main trajectory, although this is not the only use of fair value gaps.

Moving one candle forward, we can see that price enters the fair value gap area, and then immediately reverses to the upside continuing its main movement. Notice here that if the lower shadow of the next candle does not overlap with the upper shadow of this candle, we'll have a new fair value gap. In the next candle, we can see that this is exactly what happens.

Another fair value gap is created. In the next candle, we can see an inside bar formation, but without entering the latest fair value gap. In the next candle, price enters the fair value gap and closes above it, clearly reacting to that zone in a similar way it did with the previous fair value gap.

After that, price resumes its movement to the upside for a few more candles. If we move one more candle to the future, we'll observe the formation of a gap as you can see in this chart. We can mark it out in the same way that was done with the fair value gaps.

The principle here is the same. This is an area that price can come back to and reverse. We can also observe inversions in some cases. In the very next candle, we can see price reacting to the gap in a similar way it did with the previous fair value gap.

In this chart, we can see how price continued going up after reacting to the upward gap. Notice also that the current candle is reacting to a fair value gap that was formed right after the upward gap. Still in the dollar index, but this time in the 4-hour chart, we can see an example of volume imbalance.

Notice there is a gap between the close of the previous candle and the open of the current candle, but there is also trading activity between the gap, which makes this a volume imbalance. In the next few candles, we can see how the volume imbalance can hold price and eventually the market starts to rise from there. Another important idea in the ICT method is called order block. There are a couple of different ways of using order blocks. Let's divide these two ways into large body candles, which are often referred to as high probability order blocks, and small body candles with more prominent chattels, which are often referred to as low probability order blocks.

Let's explore the high probability order block first. The bullish variation of an order block is formed by the large-bodied bearish candle or series of large-bodied bearish candles that sweep sell-side liquidity and then lead to a break of a node high right after it, which in this case is called a break of structure. The order block occurs at the open of the large-bodied bearish candle that sweeps sell-side liquidity. Price will often retrace back to the order block before moving higher.

The bearish variation of an order block is formed by the large-bodied bullish candle or series of large body bullish candles that sweep buy side liquidity and then lead to a break of an old low right after it, which in this case is called break of structure. The order block occurs at the open of the large body bullish candle that sweeps buy side liquidity. Price will often retrace back to the order block before moving lower. Notice that high probability order blocks come from simple expanding pivot formations where a lower low is followed by a higher high in the case of a bullish order block, or when a higher high is followed by a lower low in the case of a bearish order block. We also have the low probability order blocks, which are formed by small body candles with more prominent shadows occurring in the middle of a single price movement.

These can also be divided into their bullish and bearish variations. In the bullish variation of a low probability order block, we find a small body bearish candle in the middle of a price movement composed by mostly bullish candles. The order block sits in the space between the high and the open of the small body bearish candle.

Price will often retrace to this order block before resuming the movement upwards. In the bearish variation of a low probability order block we find a small body bullish candle in the middle of a price movement composed by mostly bearish candles. The order block sits in the space between the low and the open of the small body bullish candle. Price will often retrace to this order block before resuming the movement downwards. Let's take a look at an example of a high probability bullish order block in a real price chart.

In this chart you can see that I marked out the latest swing low highlighting a sell side liquidity level. Recall that in a bullish high probability order block, you must identify the sweep of sell side liquidity first. In this next chart, we can see that sell side liquidity is swept by a large body bearish candle. Notice also that the upper tail of the previous candle forms a swing height. We want price to break this latest swing high.

That would be the very next step for us to use an order block in this case. Moving price forward a few candles we can identify a break of structure. Meaning that price rises and breaks the latest swing high. In summary, we swept the sell side liquidity and failed to move down after it. Price comes back up and breaks market structure.

This is a setup for a high probability order block. In this case, the order block sits in the opening price of the large body bearish candle that swept sell side liquidity. Price will often retrace back to the order block, as you can see here, which would be the long trade setup, and then price goes to the upside as expected, as you can see in this final chart. There are a couple of important details in here. Notice that price touches the order block two times before going to the upside, which would be the opportunity for a secondary entry.

in case you missed the first touch. Beyond that we can also see a low probability bullish order block working as you can see in this area. A small bodied bearish candle in the middle of a bullish movement where we mark the distance between the high and the open. Observe how price action comes back to this area right after and goes up from there. Let's move on now to a real example of a high probability bearish order block where we use another type of entry called mean threshold instead of using the opening price.

of a large body bullish candle as the order block. In this chart I marked out the buy side liquidity level and we can see price approaching that level. This is the moment you begin to anticipate a liquidity sweep.

In this next chart you can see that price sweeps buy side liquidity and then fails to move higher. Notice also that a new swing low just formed, so if price breaks it to the downside we can look for an order block setup, this time looking for the mean threshold of the order block. In this situation the order block is the large body bullish candle that leads to the liquidity sweep.

The mean threshold is the 50% Fibonacci retracement from the open to the close of that candle as you can see here. In this next chart we can see price breaking the last swing low. The setup now consists in waiting for price to retrace back to the mean threshold of the order block.

Advancing a few candles into the future we can see price retracing back up and meeting the mean threshold and right after that price goes down completing the bearish order block setup. An interesting detail here is that we can spot that a low probability order block formed in the same level of the mean threshold of the high probability order block. As is the case with any method the trader must find the intersection of techniques in order to find the best trades. The final ICT concept we'll study in this beginner's guide is the daily bias.

The daily bias is exactly what it sounds like. It's a way to determine if the next day will be bullish or bearish. We can determine that in a very simple way using the previous day's high and low and the observation of what price does at these extremes.

Let's look at the basic idea of the bullish daily bias. Let's say you begin with this candle and you mark out the high and low of the day. In the next candle, price breaks and closes above the previous day's high.

That would generate a bullish bias for the next day. Another example of bullish bias is when price fails to move below the previous day's low, like so. Notice that price breaks the low, but it cannot close lower. In the second case, we can expect the next day to be bullish or at least the high to be met.

In the case of a bearish daily bias, the rationale is the same. If price breaks and closes below the previous day's low, we have a bearish bias for the next day. If price breaks and fails to close above the previous day's high, we also have a bearish bias for the next day. In the second case, we can expect the next day to be bearish or at least to reach the previous day's low.

This concept, like many others, is better understood in practice. So let's take the daily chart of the dollar index to see how this works. Let's say we begin with this current candle.

The first step is to mark out the high and low. We'll go on to the next candle. we can see that it broke and closed below the previous day's low. So we have a bearish bias for the next day.

We mark out the current high and low. Two things can happen in the next candle. We should see price reaching this low, which in this case is very close to the current price, or we should see price break this low and close below it. In the next day, we can see that our bearish bias was correct.

And since price closed below the previous day's low, we continue with the bearish bias for the next day. Now I mark out the new high and low. You should see price breaking to the downside or at least reaching the new low.

In the next candle we can see that our bias was correct. Since price closed below the previous day's low, we continue with a bearish bias. We now mark the new high and low.

Price is expected to at least reach the new low or break and close below it. In the next candle we can see that price moves sharply to the downside, once again confirming the daily bearish bias that was anticipated in the previous day. We now mark the new high and low.

Once again, we expect price to reach the new low. or break and close below it. In the next candle we can see that the bearish bias was correct and we mark out the new high and low.

In the next candle we can see something new happening. Notice that we did reach the previous day's low as expected. We broke the previous day's low but we closed back up into the range.

This generates a bullish bias for the next day. We now mark the new high and low. In other words, we should see a bullish candle surpassing the previous day's high where it leads price reaching the previous day's high. In the next candle we see price reaching the previous day's high as expected, but a bearish candle appears, so our bias was wrong in a way, but it was correct about reaching the previous day's high.

Notice also that we broke the previous day's high and failed to close above it. This generates a bearish bias for the next day. We must also update the high and low to the current candle. Since the bias now is bearish, we expect price to at least reach this low or break and close below it. In the next candle we can see that price does reach the previous day's low but failed to close below it generating a bullish bias for the next day.

Before moving on we must update the high and low to the current day. Now we have a bullish bias for the next day so we should see price at least reaching the previous day's high or producing a bullish candle that surpasses that high. In the next candle We see that price did reach the previous day's high and surpassed it, creating a bullish daily bias for the next day. Before moving on, we update the new high and low. Once again, we should see price at least reach the previous day's high or surpass the previous day's high in a bullish daily bias.

In the next candle, we not only reached the previous day's high, but we also surpassed it, creating a new bullish bias. Now we update the new high and low. We expect price to at least reach the previous day's high. previous day's high or surpass it and close above it.

In the next day we close above the previous day's high creating a bullish daily bias for the next day and now we update the new high and low expecting price to at least reach the previous day's high. The next day we see price closed above the previous day's high generating a new bullish daily bias for the next day updating the new high and low we expect price to at least reach the new high in the next day. In the next candle we did reach the previous day's high, but price failed to close above it.

That generates a bearish bias for the next day. Updating the new high and low, we expect price to at least reach the previous day's low now. The next day, price not only reached the previous day's low, but it also closed below it, generating a new bearish bias for the next day. Updating the new high and low, we now expect price to at least reach the previous day's low. The next day, we see that price indeed reached the previous day's low and then created a bullish candle that closed above the previous day's high.

By the way, notice how price reversed at a fair value gap in here. Now we have a bullish bias for the next day. Updating the new high and low, we expect price to at least reach this high the next day.

Moving one candle to the future, we see that price did reach the previous day's high, but failed to close above it, therefore generating a bearish bias for the next day. Updating the high and low, we now expect price to at least reach the previous day's low. The next day we have an inside bar, so we failed to reach the previous day's low, and we don't have a bias for the next day.

Now we can update the new high and low and see what happens. The next day we close above the previous day's high, generating a bullish bias for the next day. Updating the new high and low, we expect price to at least reach the new high in the next day.

Moving forward, we can see that we did reach the previous day's high and close above it. I guess you can get the idea of how this works by now. In all these candles, the bias only failed to meet its condition once, when the inside bar appeared. In other words, it worked most of the time.

This idea of the daily bias can also be used in intraday charts. The principle is exactly the same. The daily bias can be used to frame a trade in a lower time frame as well.

This finishes this beginner's guide to the ICT method. The ICT method goes much further than this. but these are the foundational concepts you can incorporate in your trading right away.

If you want to go deeper into it, you can visit ICT's channel in the video description. That's it for this video. If you enjoyed it, please help support the ongoing creation of free videos like this one by clicking the like button, subscribing to the channel, activating the notifications, leaving your feedback in the comment section, and sharing this video with your trading community.

Thank you very much for watching and I hope to see you. in the next videos. Take care.

Transcript for:Fundamentals of ICT Trading Strategies

Transcript for:
Fundamentals of ICT Trading Strategies