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INTRODUCTION TO ICT TRADING STRATEGY
Trading has evolved over the years and with this evolution comes diverse trading approaches and strategies. Some of these strategies have grown to become very successful while some have also fizzled out with time. In this time and age, one of the most thriving trading strategies or as I love to say, one of the most thriving trading schools of thought that has created lots of reactions, proven to be very dynamic and also effective through various testimonies is the ICT Trading Strategy.
This ICT Trading strategy is a very comprehensive strategy that combines technical analysis, market structure analysis, order flow dynamics, risk management, and psychological discipline. Traders who follow ICT’s teachings aim to develop a structured and systematic approach to trading financial markets with a focus on consistency and profitability.
In this article, I will be breaking down the ICT trading strategy for you my readers, simplifying it so that it becomes very easy to understand and I will also be giving some of the best ICT trading strategies approaches that were developed to help strengthen your understanding of the strategy.
If you are excited to learn this amazing strategy, get yourself a bottle of chilled drink, your notepad, pen and your personal computer as we delve into this article.
MEANING OF ICT TRADING STRATEGY
The Inner Circle Trader (ICT) Trading Strategy is a strategy that empowers traders with a deep understanding of how the market functions that is the structure of the market and how institutional players or traders influence price movements. ICT trading is a methodology that involves the use of raw price action without reliance on several conflicting indicators. This trading method relies on several concepts to help deepen a trader’s holistic understanding of the market.
This ICT trading methodology was developed by a trader known as Michael Huddleston and revolves around the concept of analyzing market movements through the lens of “smart money” or institutional traders. I guess you now have some understanding of what ICT trading is, the next step is to explain the concept in which the ICT trading strategy operates and how these concepts are used in analyzing the financial markets.
BASIC ICT CONCEPTS
ICT concepts are a set of trading principles designed and used in the ICT trading strategy to help traders make better decisions in the financial markets. These concepts were developed by a trader named Michael J. Huddleston, also known as the Inner Circle Trader (ICT). Several concepts and principles are guiding the ICT trading strategy and I will be listing and also giving a detailed explanation of them with practical illustration. Below is a list of some of the basic ICT concepts.
SWING POINTS & LIQUIDITY
The first concept I will be writing about in this article is the 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.
Looking at the diagram above you will see that 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 centre has a higher low to the left and a higher low to the right as shown in the diagram above.
The reason the idea of swing points is important is that many retail traders place Stop orders just above swing highs or just below swing lows, meaning that liquidity is deeper in these areas.
You should know 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.
BUY SIDE LIQUIDITY
Looking at the diagram above you will see that 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 the price surpasses the swing high. In ICT trading terms, this level represents buy-side liquidity.
SELL SIDE LIQUIDITY
Again looking at the diagram above, 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 the price surpasses the swing low. In ICT trading terms, this level represents sell-side liquidity.
SWING POINTS & LIQUIDITY
The first concept I will be writing about in this article is the 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.
Looking at the diagram above you will see that 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 centre has a higher low to the left and a higher low to the right as shown in the diagram above.
The reason the idea of swing points is important is that many retail traders place Stop orders just above swing highs or just below swing lows, meaning that liquidity is deeper in these areas.
You should know 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.
Buy Side Liquidity
Looking at the diagram above you will see that 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 the price surpasses the swing high. In ICT trading terms, this level represents buy-side liquidity.
SELL SIDE LIQUIDITY
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Again looking at the diagram above, 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 the price surpasses the swing low. In ICT trading terms, this level represents sell-side liquidity.
The identification of buy side and sell liquidity levels is important in many ways in the ICT trading strategy. Now that we already have an idea of what buy & sell side liquidity means, let's move on to a real price chart and observe examples of buy-side and sell-side liquidity levels to better increase your understanding.
Looking at the 5-minute chart of the mini S and P, you can see that 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 in the chart above will be classified as a swing low, which represents a point of sell-side liquidity.
Now, looking at the chart above we can see that the next candle that follows, is a higher low, so we can go ahead and classify the previous low candle as a swing low.
While we are 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 as indicated by the blue line in the chart above when compared to the current candle. If the next candle also produces a lower high. Then the point indicated with the red line on the chart above will be classified as a swing high or buy side liquidity.
Looking at the chart above in the next candle, we can see that it produced a lower high as indicated by the blue line on the chart above, so we can go ahead and mark the previous green candle as a swing high. Again we have the potential to another swing low. If the next candle produces a higher low, we'll have another swing low.
Looking at the next candle, we can see that it doesn't happen, rather the new candle forms a lower low as you can see in the chart above. Now this new candle is a potential candidate for a swing low because it has a higher low to its left also.
In the next candle, we can see that a new swing low forms, so we can go ahead and mark it out as shown on the chart.
In the next 2 candles shown in the chart above, we can see that the 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. You can see from these illustrations that identifying swing points is very simple, it's also a good idea to practice it often in real-time, so it becomes very easy for you to identify or spot them.
Once you start to mark swing points in real price charts, you will notice that certain swing points cluster together while others remain isolated, giving rise to two distinct definitions of highs and lows called 'equal highs & lows and old highs & lows.
In the chart above, we can see an example of equal highs. Notice how three swing highs cluster together roughly at 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 at the same price level perfectly. They simply cluster together in the same area.
In the chart above, we can see the concept of old highs and old lows in the circled wicks/shadows, 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 therefore forming a wick and then it starts to go up. This is an important discovery not only for the ICT Trading concepts but in the overall idea of market manipulation, meaning the triggering of liquidity to deceptively induce retail traders to one side of the market.
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's highs and lows the previous day's highs or lows, the Trading session's highs and lows or the even the intraday timeframe high and lows.
We'll take another look at that when we talk about the concept of daily bias. The next ICT concept we will be looking at in ICT trading strategy is the idea of discounts in premium zones.
Discount & Premium Zones
To understand what this is 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 as shown in the diagram above.
Let's take the example of the range from a swing low to a swing high using the diagram below for illustration.
To define a premium and discount zone, we divide the range into 2 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 ideas.
As depicted in the diagram above, we can see an upward movement and we are set to look for a long trade opportunity, the lower into the discount zone we take our long trade opportunities, 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 as shown above, 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 can 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 the OTE which is short for optimal trade entry.
Optimal Trade Entry (OTE)
Getting to this point of the article means you find it helpful, and I appreciate that. To continue reading, kindly read the full article here, as the article is lengthy, and there is still a lot to learn. You can also visit https://www.dipprofit.com/the-best-ict-trading-strategy-for-beginners/ to read the complete article.
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