ICT Trading
ICT Trading
ICT Trading
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Topics
• Introduction to ICT Trading Strategy
o What is the Full Meaning of ICT
• Meaning of ICT Trading Strategy
• Basic ICT Concepts
o Swing Points & Liquidity
o Buy Side Liquidity
o Sell Side Liquidity
o Discount & Premium Zones
o Optimal Trade Entry (OTE)
o Fair Value Gaps
▪ Bullish Fair Value Gap (BFVG)
▪ Bearish Fair Value Gap (BFVG)
o Fair Value Gap Inversion
o Volume Imbalance & Gaps
o Order Blocks
▪ High Probability Order Blocks
▪ Low Probability Order Blocks
o Daily Bias
o Displacement
• ICT Trading Strategy Methodology
o Smart Money Concept Trading:
o Silver Bullet Trading Strategy:
• Final Thoughts
• Frequently Asked Questions (FAQ)
o Is ICT Trading and SMC Trading the Same?
o Who Created the ICT Trading Method?
Is ICT Trading Method Profitable?
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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.
We now know the full meaning of the acronym ICT” let’s move
on to understanding the meaning of ICT trading, what makes it
stand out and the major trading aspects it emphasizes.
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▪ Swing Points
▪ Buy Side Liquidity
▪ Sell Side Liquidity
▪ Discount & Premium Zones
▪ Optimal Trade Entries
▪ Fair Value Gap (Bullish & Bearish)
▪ Fair Value Gap Inversion
▪ Volume Imbalance & Gaps
▪ Order Block (Low & High Probability)
▪ Daily Bias
▪ Displacement
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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.
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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.
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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.
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Using the illustration in the diagram above you can see the
OTE for a long trade notice how the zone falls into the discount
zone. It’s important to observe how price action reacts to the
three levels of this zone especially the midpoint at 0.705
retracement level.
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In this other illustration above you can see the OTE for a short
trade notice how the zone falls into the premium zone. It’s
important to observe how price action reacts to the three
levels of this zone, especially the midpoint retracement level,
just like in the case of an OTE for a long trade.
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Looking at the chart above you can see the 4-hour chart of the
EURUSD, here I already marked out an important swing high
and swing low.
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Since we have been able to establish our swing high and low
on the chart, we will mark out the discount and the premium
zones generated by this range. By now you should know that a
range is the distance between a swing high and a swing low.
The next step is to mark out the OTE or optimal trade entry for
this range as shown in the above chart. Notice how the OTE
falls into the premium zone if the price comes back to that
level.
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In the chart above, we can see that price reacts a little to the
downside but then returns back up to the OTE, closing above
the midpoint but still below the 0.79 level.
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In the very next candle, we can see from the chart above that
the market drops significantly. It takes just one more candle for
price to reach the swing-low target.
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In the chart above we can see that price continues going down
afterwards, so even though a 2:4 risk-to-reward ratio is not
terrible, there was a lot more that could be extracted from this
trade, but as we always say, let’s not be greedy.
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In the chart above you can see that the price just made a swing
high.
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The next thing is to draw the discount and premium zones and
then plot the OT using the range outline as shown in the chart
above.
In this chart, we can see that price returns to the OTE into the
discount zone and reacts to the lowest level of the zone by
touching it without closing below it.
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Right after touching the lowest OTE in the discount zone the
price begins to rise in the direction of the old high, swing high
or buy side liquidity level as you can see in the chart.
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The bullish fair value gap is a pattern where the upper shadow
of the first candle doesn’t overlap with the lower shadow of the
third candle, creating a gap between the two. You can see the
illustration in the diagram above
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Looking at the chart above on the left, we can see that there is
no overlap between the upper shadow of the first candle and
the lower shadow of the third candle, therefore creating a fair
value gap. On the right, we can see that the upper shadow of
the first candle overlapped with the lower shadow of the third
candle. In this case, there is no fair value gap.
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The bearish fair value gap is often called SIBI which stands for
sell side imbalance and buy side inefficiency. The bearish fair
value gap is a pattern where the lower shadow of the first
candle doesn’t overlap with the upper shadow of the third
candle, creating a gap between the two as shown in the
diagram above.
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Looking at the chart once again, on the left side we can see
that there is no overlap between the lower shadow of the first
candle and the upper shadow of the third candle, therefore
creating a fair value gap.
On the right, we can see that the lower shadow of the first
candle overlaps with the upper shadow of the third candle. In
this case, there is no fair value gap.
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Let’s take a look at the BISI or Bullish fair value gaps first. The
ideal scenario is to see price reacting to the upper limit of the
fair value gap, meaning piercing it and closing above it as
shown above. That’s one way of knowing that price is
respecting the fair value gap.
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In the above illustration, you can see the bearish version of the
fair value gap reversal. The principle is the same of course but
everything is flipped upside down. As is the case with other
types of support and resistance.
One thing of note is that Price can disrespect the fair value gap
and test it on the other side. In ICT trading terms this is called a
fair value gap inversion.
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Looking at the diagram above, you can see the bullish version
of the fair value gap, volume imbalance and the gap side by
side for comparison and also for clarity to clear any form of
confusion you might be having.
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Looking at the chart above, we can see that the price enters
the fair value gap area and then immediately reverses to the
upside, continuing its main movement. Notice on the chart that
if the lower shadow of the next candle does not overlap with
the upper shadow of this red candle marked with a blue line in
the chart, we’ll have a new fair value gap.
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Still in the dollar index. looking at the 4-hour chart we can see
an example of a volume imbalance.
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ORDER BLOCKS
Another very popular ICT concept is called order block. There
are a couple of different ways of using order blocks.
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It then leads to a break of an old low right after it, which in this
case is called a break of structure (BOS).
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The order block occurs at the open of the large body bullish
candle that sweeps buy side liquidity, price will often retrace
back to the order block before moving lower.
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One thing of note about the order block is that high probability
order blocks come from simple expanding pivot formations
where a lower low is followed by a higher high in the case of a
bullish order block as shown above.
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Price will often retrace to this order block before resuming the
movement downwards. Let’s take a look at an example of a
high probability bullish order block in a real price chart.
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In the chart above you can see that I marked out the latest
swing low, highlighting a sell side liquidity level.
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In the chart above we can see that the sell side liquidity is
swept by a large bearish candle. Notice also that the upper tail
of the previous candle forms a swing high. We want the price
to break this latest swing high. That would be the very next
step for us to use an order block.
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Price will often retrace back to the order block, as you can see
here, which would be the long trade setup and then price goes
to the upside as expected as you can see in the chart above.
There are a couple of important details in the chart above. You
will see that price touches the order block two times before
going to the upside, as indicated by the two blue lines. This
would be the opportunity for a secondary entry in case you
missed the first entry.
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DAILY BIAS
The daily bias is exactly what it sounds like. It is a way to
determine if the next day will be bullish or bearish. We can
determine that in a very simple way using the previous day’s
high and low and the observation of what price does at these
extremes.
Let’s look at the basic idea of the bullish daily bias. If you begin
with the candle in the diagram above and mark out the high
and low of the day. In the next candle, price breaks and closes
above the previous day’s high, which would generate a bullish
bias for the next day.
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Notice that price breaks the low but cannot close lower. In the
second case, we can expect the next day to be bullish or at
least the high of the previous day’s candle to be met.
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If price breaks and fails to close above the previous day’s high,
we also have a bearish bias for the next day. In this case, we
can expect the next day to be bearish, or at least to reach the
previous day’s low. This ICT trading concept, like many others,
is better understood with practical illustrations.
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So let’s take the USD index daily chart above and see how this
ICT concept works. Let’s begin with the current bearish candle
highlighted in the chart. The first step is to mark out the high
and low as we have already done.
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Looking at the next candle in the chart above, we can see that
it broke and closed below the previous day’s low. So according
to the ICT concept daily bias rule, we have a bearish bias. For
the next day, we mark out the current high and low of the
current candle, as shown in the chart above.
Two things can happen either in the next candle, we see price
reaching the low marked with the blue line in the chart above
which in this case is very close to the current price or we
should see price break this low and close below it.
On the next day, we can see that our bearish bias was correct
and since price closed below the previous day’s low we
continued with the bearish bias for the next day again.
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Now the next thing to do is to mark out the new high and low,
as shown above. We should see price breaking to the
downside or at least reaching the new low.
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In the next candle, we can see that our bias was correct
looking at the chart above, since price closed below the
previous day’s low, we continue with a bearish bias.
We will start with the current green candle and mark the new
high and low. In other words, we should see a bullish candle
surpassing the previous day’s high or at least price reaching
the previous day’s high.
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We must also update the high and low to the current candle as
shown above. Since the bias now is bearish, we expect price to
at least reach this low or break and close below it.
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In the next candle, we can see that price does reach the
previous day’s low, but fails to close below it generating a
bullish bias for the next day again.
Before moving on, we must update the high and low to the
current day, which is displayed in the chart above. Now we
have a bullish bias for the next day, so we should see price at
least reaching the previous day’s high or producing a bullish
candle that surpasses that high.
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In the next candle, we see that price did reach the previous
day’s high and surpassed it creating a bullish daily bias for the
next day.
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Before moving on, we need to update the new high and low.
Once again, we should see price at least reach the previous
day’s high or surpass the previous day’s high in a bullish daily
bias.
In all these candles, the daily bias only didn’t seem to fail in
meeting one of the two criteria used for determining its bias. In
other words, it worked most of the time. This doesn’t mean it is
foolproof but it is a reliable concept that helps ICT traders
understand the market better The idea of the daily bias can
also be used in intraday charts.
The principle is the same, the daily bias can be used to frame a
trade in a lower timeframe as well.
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DISPLACEMENT
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Next, you decide on your direction and find a way to enter the
trade, following the order methods taught by ICT – it’s not
difficult to find an entry point. After that, you set your stop loss,
take profit, and let the trade run its course.
FINAL THOUGHTS
ICT Trading is one of the most detailed and compact trading
strategies currently available in the trading community today
and almost every modern-day swing trader or day trader is
gradually including some if not all of the trading concepts in
their trading exercise.
I hope you have been able to learn a lot from this article, if you
have then it gladens our hearts to have been of assistance. We
would also like for you to drop a like and leave your comment
as this will encourage us to do more. If you have any questions
you can also drop them in the comment session. See you in our
next article.
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