 |
Hello everyone, I have been studying ICT’s material in depth since I saw his name mentioned here back in November. I have watched the majority of the 2022 Mentorship, many of his older videos, many videos made by people who have studied his work, and many, many hours back and forward testing the concepts. They do indeed work, and it is my preferred way to trade. I’ve had fun predicting moves & news reactions in advance and watching it play out almost to the tick. But as I’ve gone deeper into studying his work, I’ve reached some dead ends. He doesn’t explain why his concepts work the way they do, and the “algorithm” bit with no further explanation doesn’t quite cut it for me. If anyone tries to explain his concepts on his behalf he will rant endlessly about it, which is honestly extremely irritating once you’ve heard enough of it. He seems to believe he’s the only one who has “figured out” the market, which is honestly bizarre. Most importantly, I’ve become worried that as his ideas become more widespread they will lose their edge. Others have asked him about that to which he responded, “well, keep trading it until it stops working”. Not very reassuring… So I’ve spent the past few weeks trying to break down his ideas into its most basic parts, and I wanted to share my progress. Those of you who dislike him will probably be happy to hear that it can be broken down like this, and those who trade his ideas might be surprised for the same reasons. This is a work in progress, I haven’t quite figured it all out, but I’d like to hear your feedback: Fair Value Gaps (FVGs): I’m not going to argue that fair value gaps and the way they are used isn’t unique to him. I will argue, however, that the thought process behind them can be broken down into composite parts. Auction Market Theory (AMT) argues that markets move higher and lower in response to imbalances between buyer and seller activity. Consider a typical auction: the auctioneer starts at $1,000 and is unable to find any bidders. As he reduces the initial price to $900, 800, 700, etc. he finally finds an initial bid at $600. The auction heats up, and price is quickly bid up to $1,000, ending at $1,800 thirty seconds later. Caught up in the moment, the item is bought well past its “fair value” of $1,200. A similar pattern plays out in financial markets, and the “gap” between fair value and price at various points in time has been recognized for quite some time. In “Markets in Profile: Profiting From the Auction Process” (2007), the authors argue that “fair value” is where most volume is found, and as the auction process unfolds, one party tries to move price away from fair value. They additionally argue that price can be “fair” on one timeframe and “unfair” on another. This is found on pages 20 & 21 of the book. The unfolding of this process can be seen using Volume Profiles. Consider the following leg down on NQ Friday morning, 15min chart: Price moves down quickly, creating the typical order block & fair value gaps reversal pattern from ICT’s 2022 mentorship. Applying a fixed volume profile to this leg down shows a high volume node at the order block and low volume node coinciding with the fair value gaps. Once the retracement is complete and the next leg down reaches its target (below the start of the fib pull), we can generate another fixed volume profile from the start of the first leg down to the end of the second. This produces a “balanced” volume profile, indicating that enough opportunity was presented at each price level to ensure that willing participants were able to get in/out at their preferred entry/exit. Here’s another example on the NQ 30min chart from the last week of January: And after… Two methods of analysis telling the same story So then, fair value gaps & order blocks appear to be used as a shortcut to determining points where bullish and bearish orderflow dominated and inferring HVN’s and LVN’s from candlestick patterns. This shouldn’t be surprising, given that he to use the term “institutional orderflow” to describe certain patterns in market behaviour. When he talks about “sell/buyside imbalances”, price needing to “paint” the chart by returning to all levels long enough to offer price at different levels (Time Price Opportunity anyone?), he is in many ways just restating orderflow. ICT Market Structure As he explains himself, this is more or less an extension of Larry William’s interpretation of market structure from his book “Long-Term Secrets to Short-Term Trading” (1999). You can find short/intermediate/long-term highs used similarly in this book. Another interesting thing that Williams notes in this book: On 85.4% of trading days, the previous day’s high or low are taken out. On 7% of days, both are taken out. The last 7.6% are inside days. I did a quick count of /ES for 2022, and noted that on about 82.8% of trading days, one side was taken out. Both were taken out 10.7% of the time, and the remaining 6.5% were inside days. This means that about 95% of the time the previous day’s high or low are taken out. If you can predict which direction wants to go and position yourself accordingly, you probably have a solid chance of hitting your target before your stop. “The Algorithm”: I agreed with this at first, but it no longer makes any sense to me after watching him explain it. He claims that there is an “Interbank Price Delivery Algorithm” (IDPA) orchestrated by central banks which causes price to move predictably. Okay, sure. Central banks can manipulate/adjust their currency as they wish, so it’s not completely out of the question. What’s confusing is that he argues that this “price delivery algorithm” is applied to all asset classes without explaining who is doing it and why. In another video he claims that a “long time ago” two guys approached him and informed him of the existence of the “algorithm”. He didn’t explain any further. The closest related concept I can find is in Wyckoff. He argues that it’s useful to conceptualize your opponents in the market as one person who pulls the strings and actively works against you. Everyone who has been in the market long enough is clearly aware that there are people/institutions/algorithms taking advantage of retail stop placement for liquidity. Any higher level of orchestration beyond that requires more explanation and proof than what he currently offers. Stops above and below old highs This seems to have been known for quite some time. He has explained himself that he would read about the presence of stops above and below highs & lows and how to avoid stop hunts, but didn’t understand why the authors didn’t argue for going along with the stop hunt rather than avoiding it. This is odd, because I’ve found two versions of author’s arguing for something similar…
Dalton et al., Markets in Profile: Profiting From the Auction Process (2007) A somewhat similar thought process is found in “Street Smarts” by Raschke & Connors (1996), a book which ICT himself seems fond of (which is how I ended up finding and reading it). He even borrows and reinterprets their “Turtle Soup” setup and applies it to all timeframes—essentially a mean reversion/false breakout/failure swing play. Quoting the book would make this post too long, but feel free to check out “Chapter 4: Turtle Soup”. “Optimal Trade Entry (OTE)” This post is getting a bit long, but I would invite you to read into Elliot Wave Theory. Elliot wave theorists argue that the first corrective wave after a new sequence tends to retrace to at least the 0.5fib level and often the .618 potentiality down to the .786 level before initiating the third wave, which moves above the high of the first and is often the longest of the five wave sequence. It shouldn’t really come as a surprise then that ICT’s trade entry strategy involves using the 50% retracement level as an entry, with the 61.8% to 78.6% range (and their midpoint, 70.5%) being “ideal”. “Power of Three” (Accumulation, Manipulation, Distribution) Sorry, but this is rebranded Wyckoff—Accumulation, Markup/Markdown, Distribution. It rubbed me the wrong way when he said that he “laughed” at Wyckoff when he looked into his works because he “didn’t get” what was going on, given that he blatantly stole his main idea. In conclusion… I won’t deny that there’s ideas that ICT came up with on his own. I also won’t deny that they’re useful: before getting into his work I struggled to figure out what was going on with the market on an average day, and now I trade naked charts and am on the path to consistent profitability. That said, his claim that only he understands “how the markets truly work” is absurd, and his ranting combined with his insistence that other people stop trying to teach “his” concepts is not only irritating, but makes little sense in light of the fact that many of “his” concepts are found in other traders/authors. So he can borrow ideas and reteach them for a price, but nobody else can? There are only so many ways to interpret market behaviour, and eventually two people will independently stumble on the same ideas. Not too long before I got into ICT I was getting my ass kicked by a trend day (before I understood what they were and how they worked) and asked myself “how can price keep going up so fast without pulling back, look at all those gaps between the candles”. For those of you who trade his strategies, hopefully this post will help you branch out a bit more. Studying the books below has helped me come to a deeper understanding of the market. For those of you who hate him, well I guess this will feed your bias :’) Apologies if this is poorly written or a bit disjointed, it took a long time to get this all out and I lost the urge to edit it afterwards. Just going to hit post and call it a day. Further reading—some of these books he recommends himself: Raschke & Connors, Street Smarts: High Probability Short-Term Trading Strategies (1996) Williams, L., Long-Term Secrets to Short-Term Trading (1999) Jones, Ryan, The Trading Game: Playing by the Numbers to Make Millions (1999)) this isn’t relevant to the post, it’s just a book he recommended that I like) Dalton et al., Markets in Profile: Profiting From the Auction Process (2007) Dalton et al., Mind Over Markets: Power Trading with Market Generated Information, 2nd ed. (2013) submitted by /u/ml-powerlifting to r/FuturesTrading |