Okay folks, welcome back to the fifth of eight teachings for the month of November 2016 ICT membership. Okay, we're looking at inside price action, institutional market structure. Okay, now what is institutional market structure?
It's the analysis of correlated assets with a relationship to inversely correlated assets. The purpose is to determine... what the smart money is accumulating or distributing.
Now currencies are the easiest to analyze with institutional market structure and we utilize the dollar index. Every price swing should be studied to determine if market symmetry confirms it. Now how do we identify institutional market structure in Forex? We compare every price swing in the dollar index with the foreign currency that we trade. As the U.S. dollar index trades higher, we reasonably expect a lower price swing in foreign currency pairs.
If the U.S. dollar index or a foreign currency pair fails to move symmetrically, smart money is actively trading. As the U.S. dollar index trades lower, we reasonably expect a higher price swing in foreign currency pairs. If the U.S. dollar index or foreign currency fails to move symmetrically, again, smart money is actively trading.
Okay, let's take a closer look about what this concept actually means. And we're going to be referring to the U.S. dollar index SMT divergence. Now, SMT stands for smart. smart money tool or smart money technique and we're going to be looking for a divergence between closely correlated or inversely correlated assets. Now obviously if we expect the dollar index to trade higher, that's going to put downward pressure on foreign currencies.
If we're expecting the dollar index to trade lower, that's going to allow foreign currencies to rally. In a symmetrical market condition, when the dollar index makes a lower low, foreign currencies we expect that to make a higher high. When we see this, this confirms current price action and the underlying trend is likely to continue. Now the idea of stocking reversal patterns in this condition is not highly probable.
In fact, you want to avoid it altogether. The reason why is because, for instance, let's take a look at the dollar index example here with the red line. Okay, we're going to look at the likelihood of that old low being violated as we see here. And if we see that old low violated and we see a higher high in foreign currency, that confirms the down move in the dollar index. And even though it trades back above a short term high, that short term high is going to be just a run on buy stops.
And then the dollar index most likely will resume going lower. This is one of the ways that I can basically go into the marketplace and anticipate a turtle soup before it actually happens. And the same thing said for foreign currencies. If we see that higher high, while the dollar index makes that lower low, price is confirmed.
So that means the underlying direction is still intact. So any movement down in the foreign currency pairs below a swing low or short-term low, they're gathering up the sell stops below the marketplace. And that's where they're going to be accumulating new long positions.
And then the foreign currency pairs will be allowed to trade higher and make a new higher high. Now when the dollar index makes a higher high and the foreign currency makes a lower low, this too confirms current price action and the underlying trend is likely to continue. Again, like we just said about the other slide, the idea of stocking reversal patterns in this condition is not high probability and it should be avoided. Again, once that dollar index makes a higher high and the foreign currency makes a lower low, that run above the short-term high on foreign currencies is many times going to be a run on buy stops above the marketplace and then you'll see another sell-off making a lower low And the same is said for the contrary for the dollar index.
When the market trades back below that short-term low, it's going to gather up, sell stops to pair new buying with, and it will most likely trade higher and make a new higher high. Now we're going to talk about non-symmetrical market conditions. When the dollar index makes a lower low and the foreign currency fails to trade higher than a previous high, This is US Dollar Index SMT or USDX SMT. This does not confirm current price action and the underlying trend is likely not to continue.
However, the idea of stocking reversal patterns in this condition is high probability and could reasonably be considered. That lower low on foreign currencies is indicating that the dollar index is most likely going down below previous low to do what? Wipe out the sell stops, accumulate new buying, and the rally should ensue in the dollar.
If the dollar is going to rally, that means it's going to be downward pressure in foreign currencies, and it's already shown itself in the form of weakness by having a failure swing in the foreign currency, making a lower high. Again, looking at non-symmetrical market conditions, when the dollar index fails to make a higher high, while foreign currencies make a lower low, The same thing is being said as we said in the previous slide. It's just being illustrated in a different context. This is showing the dollar index is failing to make a higher high.
That means there's underlying weakness. And there's a lower low seen in foreign currency pairs. They're going down below a previous low to accumulate all the sell stops on foreign currency pairs.
Then they'll rally the market higher. The dollar index will sell off. which would support foreign currency long positions and the underlying weakness is indicated with the US dollar index making a lower high fuels those market moves. The idea of stocking reversal patterns in this condition is high probability and could reasonably be considered. Okay, so let's take a look at a case study here.
What does this look like in price? Okay, we're looking at a daily chart of the British Pound USD, or as we call it, the cable. And notice the highs in here.
Okay, we have a higher high formed in pound dollar. This is around the end of April going into mid-June of 2016. In the same timeframe, we see the dollar index. making a low in April time period going into mid-June.
But notice the difference between the two. Going back to the pound-dollar, we have a higher high forming in the middle part of June 2016. By itself, at the time when it was rallying up, I'm sure it probably looked very positive and bullish to everyone. But if that's the case, if there is a symmetrical market condition, that should be seen with what?
in terms of the dollar. It should be seen with a lower low. Do we see a lower low form in the dollar index? No.
That's a USDX SMT bullish divergence. That means what? We're seeing underlying strength in the dollar index.
And even though this looks bullish on the British pound, it's really just taking the buy stops above the 4760 level. Once those stops are ran out, The market does in fact tank. The underlying strength in the dollar index allows us to look at that 93.80 to 94 big figure, this down candle here, that may become a future bullish order block that we could trade at.
Once this void is closed in, we know that there's underlying strength in the dollar index because there was an unwillingness to see that lower low form as we saw the higher high form in cable. So again, you can see that that higher high piercing an old high, that's going to be a run on stops above that 4760 level. Now, it trades almost up into 5065, which is several hundred pips, but it's a daily chart. So we're going to be cognizant of that.
But nonetheless, we're looking for institutional market structure. So this looks like by all indications, when the market was rallying up. Retail traders and less informed traders would see that as a bullish breakout But it's not seen with the dollar index having a lower low.
So we see the same thing we mentioned earlier, just graphically described here. The higher low formed on the dollar index. That should have created a lower low as the cable made a higher high, and it didn't.
What is that actually giving us? It's giving us a great insight about what is being accumulated. The dollar index is being accumulated on the long side.
Otherwise, it would have been permitted to go lower. If we see that and we can see a foreign currency pair shooting higher, basically acting on its own accord, if you will, that's not by accident. It's absolutely a manipulation.
So if we understand where the manipulation is taking place in the marketplace, then we can go in and capitalize on that. So now we can focus primarily on being bullish dollar. Why? Because the dollar was unwilling to make a lower low.
And the only reason why that can happen. is if it's being bought aggressively. Otherwise, they would wait for lower prices.
So since they're unwilling to wait for lower prices in the middle of June of 2016, we have to focus primarily on being a buyer on dollar. And that means put sell signals or bearish stance on all foreign currencies, looking to be a seller. This is the reason why all through the second part of 2016, I've been a dollar bull.
Okay, let's take a look at another example. And we're going to be using the daily chart again, because I want to build the idea that you don't have to be a day trader. But having these ideas will help us have a long-term to intermediate-term perspective on the marketplace.
So now we're going to turn our attention to the latter portion of August 2016 to the first week of September. And you can see that the cable made a higher high. Okay, so all indications here looked very bullish. Okay, so price was running through an old high here.
At the same time, this low on the dollar index here did not see another lower low. So as the cable was pressing higher, rallying, this dollar index should have seen a lower low. It did not do that. What that indicates is again dollar based strength In other words the dollar index is being accumulated on the long side.
The cable is being distributed Now it's being distributed above an old high here, but look to the left again above this old high here as well So now we can go and frame another level for turtle suit or a false break above an old high to run what? What type of stops reside above an old high? Buy stops.
Why would they want to take the market up to a buy stop? Because they want that buy stop to execute at the market to buy at the market. They're going to sell their long positions they accumulated here and they accumulated here. They can sell those longs at a higher price to willing buyers up here. This is being distributed.
It's being distributed at an old high while the accumulation is seen in strength because the dollar can't go lower. Now think, if the dollar doesn't go lower, it's because it can't go lower because of pricing. It's being kept while the premium is being built into the pound dollar.
So retail chases this run like this and false breakout while smart money looks at failure swings and the lows when you see what would otherwise look like. strength and breakouts on the upside in foreign currencies, always double check them with the dollar index. If you don't see that, then you know that the false breakout on the upside on the foreign currency market, it's all sucker play. It's retail candy land. Everyone's going to be looking to be going long on those false breakouts in foreign currencies, while the smart money is focused in on the dollar having an unwillingness to go lower like it does here.
So this low And I basically framed the exact dates. That's why this box is up here. So it's not like a kills or anything like that. I'm just giving you a specific date range to look at sample size of price action.
As you look at this, I want you to see just how strong it is in terms of giving us a long term to intermediate term perspective on what direction the market is going. Again, this is a daily chart. So if they're going to keep price at a higher price low here and not blow out the previous low or this low over here. We see the unwillingness to hold these prices in British Pound, U.S. State.
They quickly drop it lower because it's been distributed. They left the retail holding the bag. When accumulated long positions start moving higher, every time there's a retracement, we expect to see another expanse on the upside.
So when we look at price like this, we can see it graphically using the price chart, but I also use a tool. as an overlay for the MT4 platform and I'm going to show that to you now. Okay, here we are over at the ICT monthly mentorship form and we're in the November content thread or category as the form calls it. Okay, and I gave you several MT4 indicators today at the time of this recording and what I'm going to do is I'm going to tell you what we're going to be doing is showing you how to install this on MT4. Now it used to be where you could just download an MT4 indicator and just drop it in the indicator folder.
They have since changed that with MT4 and made it a little bit more difficult. So it's not that difficult, but it's a little bit tricky. So what we're going to do is we're going to click on the link, the MT4 line chart overlay. By clicking on that, it's giving you a download prompt over here.
You're going to click on that and you're going to click on open while you have MT4 open. And what that'll do is open up your editor. Since I already downloaded it, okay, I'm just going to say yes, I want to overwrite it.
Okay, once it's overwritten, so what I do is I go down here and I save it as Unicode overlay. Save. Yes, I want to replace it. Then you're going to close this out. and you'll go back to your mt4 platform after you restart it so i'm going to reboot mine and once it restarts i'll show you what we would do next okay here we are back rebooted and you would just go up into insert go down to indicators and go to custom and scroll down to overlay chart line click on that where it sees where it says all these double x's double click on that And what you're going to be doing is changing that to whatever pair or the dollar index you want to use.
Okay, and I'll show you what I mean by that. Let's go back and highlight a specific chart first. So we're highlighting the British pound USD chart by clicking anywhere on the chart. Go up to Insert, Indicators, Custom, Overlay Chart Line rather. Double click.
and we're going to be overlaying the US dollar index, so capital letters. Okay, and we're going to leave everything as it is here. You can see in here, we see price making that higher high. At the same time, the dollar index was failing to make that lower low.
You can get these grid lines to come off by doing this. I have a white background, so I will just change it to that. And then close, and suddenly it's gone. It makes it real clean and you'll be able to see it very crisp.
Now you can do all of your notations for your log when you're done doing your trades or as you're doing your analysis. So while we're seeing higher highs here, dollar index is making that higher low. So it should have been a lower low there.
It has not shown that as confirmation. So we see that as a turtle soup or a false breakout above an old high and an old high here. So we can look for that to be distributed.
We do not see that as strength. OK. And then obviously the market trades softer. So when we look at identifying institutional market structure, what we're basically doing is we're weighing the underlying strength. the buying and the selling at respective highs and lows in the dollar index versus foreign currencies now if you pick one particular currency pair and you Identify areas like this and expressing a daily chart it gives you a long-term Perspective where you can be focused primarily on being short that means if you are a short-term trader you could be looking to sell short at every 60 minute or four hour bear shorter block or You could be a day trader selling it above the opening price.
above the midnight candle in New York and you just capture all those types of moves going lower. So it gives you an ideal context to work within and gives you a framework. It doesn't give you ambiguity. It gives you a very specific frame of mindset going in knowing that if this is a daily chart and you were seeing underlying strength in the dollar and we've seen potential distribution in British pound USD, most likely we're going to see lower prices on cable so that way we can be a buyer on dollar based currencies.
or a seller on foreign currencies that it's paired up with the dollar index. So hopefully you found this insightful. And until next time, I wish you good luck and good trading.