Overview of ICT Trading and Key Concepts

Introduction

Have you ever heard or read about "manipulation, order blocks, fair value gap"? Surely you have and maybe that's why you have come to this article. 

ICT trading concepts are a recurrent topic of discussion on social media and perhaps you have encountered those discussions and rather than understanding this strategy, you have been misled and are still struggling in the market. 

In the next sections, we will dive deep into the core concepts behind Inner Circle Trading. Developed by Michael J. Huddleston, Inner Circle Trading concepts try to serve as a trading framework to comprehend not only the price action of a market but also its background. 

Why did the price move in the way it did? ICT tries to answer that question. It has been beneficial for traders because these concepts help to keep a systematic behavior in front of the market.

Key takeaways

• ICT concepts help resolving complexities in the market, providing a terminology for several scenarios of trading.
• Smart Money is correlated with ICT, and ICT leverages this correlation to create a basis for its own concepts.
• Manipulation and institutional trading in general plays a key role for the understanding of Inner Circle Trading.

Understanding the ICT Mindset

ICT builds its basis on top of the "smart money" interpretation, which is trying to address institutional buying and selling order flow. ICT states this is key to understanding the market structure and potential manipulation of the price action.

This trading method not only traces resistance and support levels but also makes an effort to decipher how institutional traders will behave over those levels. Likewise, ICT traces the subsequent liquidity and gaps left after institutional traders accomplish their goals.

According to ICT, the market structure is the result of frequent manipulation of the price action that leads to significant movements. Institutional traders need to create false expectations to influence retail traders and novices into making trades that can be exploited later by the smart money participants.

Through this method, manipulators will focus on "stop hunts" trying to induce the rest of the traders to fall into wrong trades through tactics like "false breakouts" of resistance and support levels that later, with the accumulated liquidity in those levels, "buy-side" and "sell-side" will emerge.

So what is market structure after all? According to ICT, it is the result of the overall patterns left by the behavior of the institutional traders during uptrends, downtrends, and general market conditions as a result of their need to induce other traders into triggerable trades after implementing manipulation tactics.

ICT carries a group of key concepts to recognize institutional trading, lets point some out:

• Optimal Trade Entry.
• Swing Points.
• Equal Lows and Highs.
• Discount and Premium zones.
• Order Blocks.
• FVG: Fair value gaps.

Key ICT Concepts

Swing Points

Swing Points are a central concept of the ICT strategy. These are highs and lows in the market structure that signal possible turning points of the price action.

For a swing high to be formed, it would be necessary for the price to move up creating a "higher high" over two previous swings. Likewise, for a swing low to be formed, it would be necessary for the price to move down creating a "lower low" over two previous swings.

This is a central concept because the price action may find resistance at swing highs and support at swing lows. Swing points are normally spotted through pin bars formation.

Equal Lows/Highs

Similar to Swing Points but not the same, Equal Lows and Highs is a complementary concept to identify support and resistance levels. The difference is that equal lows and highs are not addressed as higher highs or lower lows but as a return to price levels touched previously.

We can say then that when key levels in the market structure, formed by supply and demand forces, are revisited, equal Lows/Highs are created. It is important to understand this difference and not get confused with swing points.

However, it is useful to mention that clustered lows and highs validate zones formed by swing points. The more a zone is tested, the more it gets validated as a support or resistance.

Discount and Premium Zones

This concept is built in the pre-assumption of undervalued and overvalued areas within a swing high and swing low zone. One way of seeing this is spotting a midpoint between two swing points, where the price ranging above will be the overvalued or "premium" area and below the undervalued "discount" area.

Optimal Trade Entry (OTE)

OTE is the holy grail of confluence: this concept evaluates all the factors possibly aligning themself providing optimal setups for a trade entry. In this sense, high probability opportunities are filtered through this approach.

But what factors should confluence? Any of those explained previously. It can be the case that as the market structure signals a price move, there are also liquidity signals along with order blocks acting as support and resistance in the presence of price action confirmation through a candlestick pattern.

What to look for when setting up an Optimal Trade Entry? Let's see:

1. Market structure confluences.
2. Order blocks
3. Liquidity areas.
4. Price action confirmations.
5. Ultimately, an indicator can act as a factor of confluence as well.

Order Blocks: clustered buying or selling zones

Order blocks in ICT represent areas where large orders are clustered creating potential reactive zones for the price action. These areas can act as support and resistance levels; once the price touches those levels, it is expected to react significantly.

Order blocks characterize themself by serving as footprints for traders to identify relevant zones, expecting them to drive the price in a forecasted move. 

Factors to consider spotting out order blocks may include:

1. Consolidations: zones, where the price was trading sideways, suggest that market participants have been accumulating and distributing orders.
2. Breakout move: sudden price-breaking moves following the consolidation period can be identified as a potential area for future resistance or support.

Fair Value Gaps (FVGs):

This concept states that the price difference between the opening and closing quotation during a relevant period is a "gap" that needs to be filled. ICT looks at gaps as a way for the market to reach equilibrium. Therefore, these gaps could be areas the price will revisit. 

Imagine a market structure in which the price has fallen several points continually, leaving the chart with an "unexplored" space, that would be the "gap" expected to be filled later in a retracement.

FVGs can be classified into two types:

1. Breakout FVGs, which occur during strong directional moves.
2. Inside bar FVGs, that are formed within trading ranges.

Examples and Trade Scenarios

Using Swing Points and Market Structure

Imagine a downtrend or uptrend market where the price is breaking out from a consolidation, then the price reaches a relevant level from where it starts going in the opposite direction. 

If it is in a downtrend, then we would be calling it a "swing low". Conversely, if it is in an uptrend, then we would be calling it a "swing high".

Applying OTE principle

As mentioned in the past section, an Optimal Trade Entry is a confluence of various factors. For this case, let's take the following market scenario:

1. The price is overvalued or in a premium zone, and an order block is identified in that zone.
2. When the price reaches the order block, this acts as a resistance.
3. Finally, the price action creates a bearish inverted-hammer candlestick pattern, suggesting a potential downtrend or reversal move.

This scenario spots three factors of confluence that will help ICT traders set up a high-probability trade entry.

Conclusion

The market is intrinsically a risky space, driven by complexities and challenging scenarios. However, professional traders have tried to develop solutions for the matter of uncertainty and forecasting, to make the structure of the market and the events that happen in it comprehensible; Inner Circle Trading presents itself as a concept that solves these issues.

Attending several situations in the market, ICT provides an extensive framework to look at the market deeply. Furthermore, it is a method compatible with analysis-making at lower and higher time frames as well as market replay, a technique widely used by ICT traders to validate the reliability of ICT concepts.

Remember that in Altrady you can explore fundamental topics related to the market structure like support and resistance, trading charts, and candlesticks. You can also Sign Up for FREE and start testing ICT concepts.

Don't forget to maintain a disciplined trading plan, and follow a strict risk management policy regarding stop-loss despite the concepts and strategy.