Overview
This lecture breaks down essential ICT (Inner Circle Trader) concepts for trading, focusing on liquidity, fair value gaps, the power of three, and order blocks to help traders understand and apply smart money strategies.
Liquidity and Liquidity Grabs
- Liquidity refers to zones on the chart with clusters of pending orders, often stop-losses, targeted by institutional traders.
- Buyside liquidity is made up of buy stops above current price, usually above swing highs, targeted by sell-side institutions.
- Buyside liquidity grabs occur when price is pushed above highs to trigger stops and reverse.
- Sellside liquidity contains sell stops below price, such as under swing lows, targeted by buy-side institutions.
- Sellside liquidity grabs happen when price dips below support to trigger stops before reversing up.
- Liquidity traps occur when both breakout traders and stop-loss holders are targeted and stopped out before the real move starts.
Fair Value Gaps
- A fair value gap is a price imbalance left when the market moves aggressively, creating a gap between the high of one candle and low of another.
- To identify, look for three candles where the first candle’s high does not overlap with the third candle’s low, sandwiching a strong middle candle.
- Use only fresh, unmitigated gaps that haven’t been retested by price.
- Larger fair value gaps are more reliable due to greater imbalance.
- Avoid fair value gaps near major support or resistance, as these can invalidate setups.
- High-probability fair value gaps often form right after a break of structure.
Power of Three
- The power of three explains price movement in three phases: consolidation, manipulation (liquidity sweep), and acceleration.
- In uptrends, expect distribution (sideways movement), manipulation (false breakout), then markdown (rapid drop).
- In downtrends, look for accumulation (range), manipulation (false breakdown), then markup (rapid rise).
- Entry signals occur after price returns inside the range following a liquidity sweep; stops are set beyond the sweep high or low.
- Profit targets are set at the next significant support or resistance.
Order Blocks
- Order blocks are zones where institutional traders place large buy or sell orders, causing significant price moves.
- Bullish order blocks form from strong buying, bearish from strong selling.
- Unlike support/resistance lines, order blocks are wide zones based on aggressive institutional activity and typically offer a single high-probability entry.
- Valid order blocks must have an imbalance (gap), remain unmitigated (not retested), and cause a break of structure or character in price.
- When price returns to a valid order block, watch for rejection as a potential trade entry.
Key Terms & Definitions
- Liquidity — Areas on the chart where stop-loss orders are clustered.
- Buyside Liquidity — Buy stops above price; targeted for sell-side trades.
- Sellside Liquidity — Sell stops below price; targeted for buy-side trades.
- Fair Value Gap — A price gap created by rapid movement, indicating imbalance.
- Order Block — A price zone of large institutional orders, often leading to strong moves.
- Break of Structure — A clear price move above/below prior highs/lows, confirming trend shift.
- Mitigated — When a price zone has been retested and its strength reduced.
Action Items / Next Steps
- Practice identifying liquidity zones, fair value gaps, and order blocks on live charts.
- Review entries based on power of three patterns.
- Draw and monitor potential order blocks for unmitigated retests and structure breaks.