Welcome back folks to lesson 4 of the May 2017 ICT Mentorship, ICT Amplified Day Trading and Scalping. This teaching is Trading and Consolidations. Okay, what's the secrets behind Trading and Consolidations?
Well, the first thing you need to understand is the focus on the daily and or 4-hour order flow subordination. What is order flow telling you on a daily basis? On the daily chart, is price suggested to go higher based on IPTA and order flow, or was it most likely going to go lower? The four-hour chart is your last line of defense in terms of determining directional bias. You want to be trading in preferably both the daily and four-hour, both suggesting higher prices or lower prices and looking for consolidations in price and a lower time frame so in other words we could be looking at a consolidation around an hourly chart or a 15 minute time frame and that may be a build-up of new positions or it could be a build-up of orders to then look for a rejection basically turtle soup but when it comes to consolidations i want you to think Obviously, what retail traders are thinking, trying to do the opposite of that in your own trading and that of what smart money does with their trades.
So retail traders, they're going to be looking for breakouts to establish a directional bias. They have no insights as to what the market may be telling them. They're looking for a cause and effect. If it does this, then I'll understand that.
OK, but they're basically chasing after price. Smart money will engineer or fade breakouts of a consolidation. Smart money is not trying to follow price.
It's going to allow price to go to a specific level when IPTA trades to a specific key level of price or a liquidity preference point or a PD array. And it happens to be in agreement with a... breakout of a consolidation, many times you're going to see a lot of institutional sponsorship on the move that fades that very thing. Retail traders buy the previous low and sell the previous high. This is in keeping with the traditions of technical analysis or what is known as classical support resistance.
Obviously, we've seen many instances where support and resistance aren't limited to just... the actual old low and the old high. Liquidity rests just above an old high or below an old low, which obviously brings us to smart money's perspective by buying under an old low and selling above an old high.
When the markets are in consolidation, understand that the consolidation itself is permitting the open float, which is the buildup of orders above and below. current market action. So market price being what it is, if markets are trading in a consolidation, that market price, you want to be looking above short term and below short term for where the buy stops and sell stops would be.
That's your open float. When the market moves in consolidations in the long sideways consolidation, the longer that consolidation is, the more orders are allowing to build up. Now, obviously, as a day trader, we're not going to expect a long phase of consolidation can be rather brief. But inside that consolidation, we have to understand what's being permitted. The orders are being allowed to stack up in terms of breakout orders, in terms of trailed stop loss orders, stop orders that would key up a entry.
For instance, buying on a stop for strength and selling on a stop for weakness. All those ideas overlap and it creates a great deal of Near term open float. So in other words the open interest above the marketplace will start to concentrate the open interest below the marketplace Begin to concentrate and you'll have a lot of liquidity Basically bracketing the market price When we look at the daily and or four-hour order flow, the subordination to that in terms of price action, when consolidations occur, whatever the direction of daily or four-hour is, that's going to be the direction of the move outside of the consolidation most often. So if price moves above the consolidation, take out an order high, and daily and or four-hour is bearish, that's usually going to be.
the best scenario for trading in the consolidation. Now, if daily and four-hour order flow is bullish, any moves below the consolidation would be viewed as smart money accumulating the sell stops for move higher. If the daily or four-hour order flow is bearish, any move above the consolidation, above an old high, is going to be viewed as smart money knocking out buy stops and accumulating short positions. The opposite is going to be seen with the retail crowd.
They're going to be basically chasing price. Retail traders chase expansions that originate from the equilibrium, and smart money fades the expansions that originate from the equilibrium. Now, let me explain this a little bit more clear.
When the market is bearish on the daily or four-hour in terms of its order flow, this subordination factor is going to be seen in the lower time frame charts, where if there is a consolidation in price, starts to trade away from the equilibrium price point higher. If it breaks a short-term high, in the event of doing that, many times retail traders are going to see that as something bullish. And they're going to look for expansions, usually ABCD type movements.
Smart money does not see that. They actually fade that and they're going to go the opposite direction. So any short-term high. That's broken as price moves away from the equilibrium price point or middle of the consolidation.
They fade that as a short-term stop run, and then they send it to the opposite extreme of the consolidation and just outside the consolidation range. Again, retail thinks in terms of old high, classic retail resistance, old low, classic retail support. We're more focused on the equilibrium price point. Because we understand premium and discount, not just simply what price did at an old high or low.
Because we understand if it turned at an old high, liquidity is going to be just below that high for a bearish order block. Or it's going to go above that high for the liquidity resting above it in the form of buy stops. In equilibrium, we want to see price moving and expanding away from that. Now, if we're looking for now at the daily or four-hour.
is bearish. In the order flow subordination on a lower time frame, we expect any consolidations, any rally away from the equilibrium price point that breaks a short-term high, we will be looking to sell short. Retail is going to want to see that as a break-in structure, if you will, for folks that want to trade empowered. They're going to see those types of things that would, in their minds, indicate a ABCD correction to the upside.
If daily or four-hour order flow is moving lower, as we understand it, and we see an expansion away from the equilibrium price point or the middle of the range and it breaks a short-term high, that is our sell scenario. And we're looking for the opposite end or the old low or retail support. That's what's going to be targeted next and then move below that. And the opposite is said for what equilibrium is expanding.
downward when the order flow on the daily or four-hour is bullish. If we see a short-term low that's broken on an expansion away from equilibrium, we'll see that as a run on buy stops, not a break in structure for lower prices. We see that as a sweep on sell stops to accumulate new longs, and then they're going to run for the other end of the consolidation or just outside of it for the liquidity for the buy stops. Pair that out.
Okay, some of the scenarios conceptually, this is what it looks like. We have price moving away from equilibrium all the way up to the outside of a consolidation. So we're going to be referencing old highs and old lows, whatever that defined range would be.
We're just classically defining in terms of support resistance here. Whenever you see price in a consolidation that's clearly definable and price rallies above, that consolidation When daily and or four-hour is bearish, retail traders are going to see this as a bullish breakout, and they're going to be wanting to buy that. That buying, if they're surging into the marketplace as a buyer, that creates the perfect opportunity as a counterparty to us who mimics the smart traders.
Smart money is going to be selling that breakout when daily and or four-hour is bearish. So we want to see consolidations. And they'll rally outside of that consolidation to entice retail or less informed traders to buy, thinking they're buying strength.
When that higher time frame, daily or four-hour order flow, is going to cause the lower time frames to be subordinate to those higher time frames. So we're going to be doing the same thing as the smart money. We're going to be selling those breakouts and consolidations. When the daily or four-hour is bullish. And the price breaks down below the consolidation.
Retail traders are going to see that as a break in structure. They're going to see that as weakness. Okay, and they're going to look to sell short on weakness. So retail traders are trying to sell that as a breakout entry or a short position.
Smart money will see the opposite of that if the daily or four-hour is seeing bullish order flow. When we see this break below an old consolidation, We understand that that's accumulation of sell stops in the form of pairing up their orders to go long. Now, inside of the range or the consolidation, when the daily or four-hour order flow is bullish, what I like to anticipate is traders seeing that old low that showed a short-term little bounce. When price trades back down to that same equal low, they're going to be buying there. And guess where they're going to put their stop loss?
Just below. that previous short-term low. So when retail traders see this, they're trading the old low as classic support and resistance theory.
Doesn't work. That right there is what we anticipate seeing. Then when we get the opposite, when price trades down below the previous low outside of the consolidation, that's where we're looking to be a buyer. We're buying up those sell stops when again the daily end or four hour is in a bullish order flow.
That creates our low risk, high probability entry. Now, when we have these conditions, we're looking for price to return back to equilibrium. We do not anticipate or always hold for the opposite end of the consolidation. We don't know that.
We have no idea if that's going to occur with any validity. We just simply take the move back to the equilibrium because price while in consolidations. It's always going to want to gravitate back to the mean, and equilibrium is the middle of what we deemed as fair value.
So always when we're in consolidations, anticipate price expanding away from the equilibrium price point than outside of the consolidation, but many times it'll snap back up into the middle of the range or go back to equilibrium. If the daily or four-hour is bullish here, even if we are going to bounce lower, After hitting equilibrium, many times this in itself will provide an opportunity to get long and have a tradable rally. Okay, the opposite here, when the daily or four-hour is bearish and we see price trade back up to an old high while it's inside the consolidation. Again, retail traders are going to see this as an old high. Classic support and resistance theory is going to be in operation.
They're going to sell short right there, and you know what they're going to do with their stop. Their buy stop is going to be placed just above. the previous high that was inside the consolidation. They have no understanding of order flow. They have no understanding of how markets have building up of liquidity around specific price levels, and they have no appreciation for how that liquidity is sought after in price.
So when retail traders see this as their entry point, we're anticipating this and then the buildup of buy stops just above that previous high. So when we Wait for that. Exercise patience.
We're looking for the consolidation breakout above a previous high. And when that happens, we're doing the same thing by mimicking what smart money does by selling above, scooping up those buy stops that retail traders or less informed traders are going to be placing because there's going to be a buildup of that buy side liquidity. So when price trades up there, IFTA will permit an opportunity for short sellers at the bank to pair up their shorts with. obvious level of buy stops that we're resting above that previous high. Okay, when the daily or four-hour order flow is bearish and we see a price move moving away from and higher, away from that equilibrium price point, and it breaks a short-term high, when that short-term high is broken, retail traders are going to see that as a break in structure, and they're going to look to buy going long, and they're going to look for an ABC-type formation and expect to see strength in that particular market.
Smart money on our hand. We see that as an opportunity to sell away from the expansion because, again, the subordination and the lower time frame charts are going to have to follow what's being dictated on the daily and or four-hour chart. So if it's bearish order flow that we're seeing on the daily and four-hour chart and we see a consolidation, we have to identify where equilibrium is and then look for short-term highs that are just above equilibrium and then a rally above that. Many times we're going to see this as the ideal entry point for shorts.
Once that short-term high is broken, that's an accumulation on buy stops. So if they're going to run the buy stops in a daily or four-hour bearish environment, that's where we look to go short. And we aim for the liquidity resting below the previous low that creates the consolidation support. We're going to pair up our buying to cover our short with those individuals that have sell stops resting below an old low.
All facilitated by a run on buy stops from a short-term high that was created just above the equilibrium price point that we used to sell into those willing buyers. So what we're doing is we're pairing orders just like the smart money does at the bank level using institution order flow from a daily and or four-hour chart. When the daily or four-hour is bullish, retail traders are going to see that sell.
opportunity in their mind by having an expansion lower that breaks below an old short-term low. They're going to see that as a break in support, a break in market structure, and they'll see that as selling short on weakness, and they're going to be looking for a continuation or breakdown in that particular market. We anticipate this very thing, and by them doing that, we're going to fade that whole move. That move...
It breaks that short-term low. Retail sees that as an opportunity to sell short. Again, they're selling weakness. That's an opportunity for us to fade that and do the very opposite.
Smart money, on the other hand, when they see that short-term low in the daily or four-hour is bullish. What they see is a run on sell stops. That short-term low is going to be building up a liquidity pool for.
Sell stops that would create immediate injections of selling liquidity. Why would they want to seek selling liquidity? Because they need to buy the market long. Their counterpart is going to be this run on that short-term low or expansion away from equilibrium. When daily or four hours bullish, what we're looking for is this particular equation right here where price comes down, snaps up, short-term sell-side liquidity.
They use that. sell-side liquidity to be counterparties to buy long. When that occurs, they expect and anticipate a move outside of the consolidation to pair up their orders with the buy stops that are resting above the old consolidation high. So what we do here is we do the same things that the bank traders do.
We anticipate it and we use the generic price action characteristics that are inside of a consolidation that Retail traders don't think. They don't think about price like this. They think about selling weakness and buying strength, and they have no understanding of what fair value is and how to use it with the equilibrium.
So now when we look at price action on the lower timeframes for day trading and on higher timeframes as well, the daily or four-hour order flow, if it's bullish or bearish, are we respecting a bullish order block? Are we reaching up to a premium PD array? That means we're going to be bullish.
That means the consolidations that we're seeing here, this is a pattern that we would like to see for our day trades. That short-term low could be, in many cases, the Asian recession low, or it could be a previous day's low. And either one of those scenarios would create a wonderful opportunity to get long as a day trade. And everything I just said here could be reversed for going short. So I want you to think about.
When markets go into consolidation, there's some very generic characteristics that we look at, or at least I do as a trader, and it helps me build an idea. But it all stems from the subordination that price is going to hold. Related to the daily and for our directional bias based on institutional order flow by using what the PDA ray matrix would be suggesting It's in play right now a discount or premium market We use our PDA ray matrix to determine what those levels that are reaching for basically and that's a that's our directional bias So if we see that directional bias arrived at from a daily chart or a four-hour chart, we have higher timeframe directional bias on our side.
Then any consolidation, we know what side we need to be working on. Any short-term low that's violated below the equilibrium, we're going to look to go long on that if it's bullish on the daily or four-hour. Any move below the old lows or the consolidation, we anticipate that as they run on sell-side liquidity.
Why they want to run the sell-stops? Because they want to pair those up with their buying. So again, we have to focus primarily on the daily and four-hour for day trades. to give us the high probability directional plays and also how to not get beat up by trading in consolidations and working on one side of the marketplace and seeking that liquidity like the banks do.
So until the next lesson, I wish you good luck and good trading.