Lecture Notes: Institutional Market Structure and Price Action

Introduction

• Topic: Understanding Institutional Market Structure and Price Action in the Forex Market
• Focus: Analysis of correlated and inversely correlated assets to determine what 'smart money' is doing (accumulating or distributing).
• Context: Fifth of eight teachings for November 2016 ICT Membership

Institutional Market Structure

• Definition: Analysis of correlated assets and their relationship to inversely correlated assets.
• Goal: Determine market actions of 'smart money'.
• Currencies: Easiest to analyze using the Dollar Index.
• Price Swings: Should confirm market symmetry.

Identifying Institutional Market Structure

• Method: Compare every price swing in the Dollar Index with foreign currencies.
  • US Dollar Index Higher: Expect lower price swing in foreign currency pairs.
  • US Dollar Index Lower: Expect higher price swing in foreign currency pairs.
• Symmetry Failures: Indicate active trading by 'smart money'.

Smart Money Technique (SMT) Divergence

• SMT Definition: Looking for divergence in correlated and inversely correlated assets.
• Dollar Index Higher Expectation: Downward pressure on foreign currencies.
• Dollar Index Lower Expectation: Foreign currencies rally.
• Trend Confirmation: Symmetrical conditions confirm the trend is likely to continue.
• Avoid Reversal Stalking: Not probable in symmetrical market conditions.

Price Action Analysis

• US Dollar Index Example: Expectations when a lower low is formed.
  • Old low violated → Higher high in foreign currency.
  • Short-term high is a run on buy stops.
  • Example of anticipating a turtle suit before it happens.

Non-Symmetrical Market Conditions

• Non-Symmetrical Condition: When expected movements in the Dollar Index and foreign currencies do not happen.
• Reversal Patterns: High probability in non-symmetrical conditions.

Case Study: Price Analysis

• Case Study 1: British Pound/USD (Cable)

  • Higher highs in Pound, lower lows not seen in Dollar Index.
  • Indicates underlying strength in the Dollar Index.
  • Retail traders may mistake this for a bullish breakout.

• Case Study 2: August-September 2016

  • Higher highs in Cable, but Dollar Index fails to make lower lows.
  • Suggests accumulation in Dollar Index and distribution in Cable.
  • Market action indicates manipulation and retail misinterpretation.

Practical Application with MT4

• MT4 Indicators: Tools for overlaying charts.
• Installation: New method for installing MT4 indicators.
• Overlay Chart Line: Shows divergence visually on MT4.
• Analyzing Charts: Identifying higher highs and lower lows with overlay tool.

Conclusion: Strategic Application

• Daily Chart Perspective: Provides long-term strategic insight.
• Trading Strategy: Use insights for short-term and day-trading decisions.
• Understanding Market Structure: Focus on underlying strengths and weaknesses in currency pairs and dollar index.
• Long-term Strategy: Ability to anticipate market moves by understanding institutional market structure.

Key Takeaways

• Institutional Market Structure: Understanding it aids in predicting market movements.
• Smart Money Technique: Essential for recognizing divergence and manipulation.
• MT4 Tools: Valuable for visualizing price action and divergence.
• Strategic Trading: Long-term insights inform short-term strategies.