If you’re a regular on trading websites, odds are you’ve come across the term ICT making its way through discussions.
Although it’s not a new player in the industry, it has been gaining traction among traders over the last couple of years.
This guide will discuss the ICT Trading Strategy and break down its key components to help you understand how it operates.
What is the ICT Trading Strategy?
The ICT (Inner Circle Trading) Strategy is a holistic trading approach that comprehensively analyzes the market structure.
Owned and operated by Michael Huddlestone, it reveals the moves of institutional traders. This allows the investors to avoid common pitfalls in retail trading.
Generally, major market players gather sizable order blocks before making significant price moves – a notable trend in forex trading.
Prices typically fluctuate within a correction range during this phase. As such, they often break resistance levels and short-term support.
What sets ICT trading apart is its ability to pinpoint the specific candle where the order flow kicks in. However, one must comprehend how the financial market operates on a 24-hour cycle to implement the ICT Trading Strategy effectively.
Key Components of ICT Trading Strategy
The ICT trading strategy operates on 7 basic components. Every trader must know how they work to leverage them while trading. Below, we’ve enlisted all.
Liquidity
Liquidity has two primary types:
- Buy-side
- Sell-side
Buy-side liquidity is a spot on the chart where traders who bet against a stock (short sellers) set up their emergency exists.
Contrarily, sell-side liquidity is the reverse – it’s where they aim for a price increase (long-biased) and place their stops.
These stops typically hang out at the extremes of the chart – the tippy-top or the rock bottom. Why? Because traders often admit they’re wrong and want out of their trades.
Seasoned players have the inside scoop on this game. Therefore, what they do is gather or unload their positions right around the spots where numerous traders have set their stops. That’s because the sheer number of stops clustered at these key levels acts like a jackpot for these big players.
So once the market trades through that level where tons of stops hang out, it’s like flipping a switch.
The price often takes a U-turn and heads the other way. This allows hunting for more action at the opposite extreme.
Displacement
Displacement brings a ton of selling or buying power to the scene. Consider it as a group of candles teaming up and marching in the same direction on the chart.
They generally have short wicks and large bodies.
In other words, they signal that sellers and buyers are pretty much on the same page and no argument is brewing beneath the surface. This bold move shakes things up in the market.
Market Structure Shift
To explain the market structure shift, let’s first consider trend basics. When things go up, it’s an uptrend (higher highs and higher lows).
Contrarily, a downtrend is all about lower highs and lower lows. Now, when the situation changes and the trend fluctuates, we call it a market structure shift.
This happens at a specific spot on the chart where the previous trend breaks.
In the uptrend, this shift happens when the price makes a lower low. For a downtrend, however, it’s when a higher high shows up.
Once the price does its thing and breaks through that market structure shift level, smart traders keep looking closely for more hints that the trend is flipping. They use the shift level as their signal to make trading decisions.
Inducement
It is worth noting that the price rarely follows a direct route. In other words, it comes with unique twists and turns.
As such, you’ll see little detours called counter-trend moves even in a big trend. Here, the market tries to hunt for some action on the lower time frames.
The price might bounce around or face rejection, then aim for a recent short-term high or low before getting back on the road in the long-term trend’s direction.
Inducement is where traders target these short-term highs or lows as areas where others may have set their stops.
The pattern fans can see inducement as the sneak peek into the formation of bull and bear flags. In other words, the market drops little hints in the form of patterns for those who are good at spotting them.
Fair Value Gap
Once the price hits a liquidity level and takes a U-turn, you’ll often see Displacement next. Fair value gaps are typically created during this time. They’re the little market imbalances.
You can spot them on the chart by looking for the three-candle sequence – one big middle candle flanked by the other two, and their upper and lower wicks don’t overlap.
Traders are often intrigued by Fair Value Gaps because they have the potential to act as magnets for future price movements.
Optimal Trade Entry
Optimal Trade Entries are golden opportunities in trade. You can identify them using the Fibonacci drawing tool.
Generally, they fall between the 61.8% and 78.6% retracement of an expansion range. Once the Market Structure Shift does its thing and a new phase of price action kicks off, a bounce occurs.
This bounce becomes a chance to take new action, and Fibonacci retracement levels help pinpoint precisely where to hop on board.
Balanced Price Range
A Balanced Price Range typically emerges when a forceful upward move is swiftly followed by an aggressive downward move or vice versa.
Following either scenario, what remains is essentially a double Fair Value Gap. It is a potential price magnet before a continued upward or downward movement.
These Balanced Price Ranges often signal the initiation of a Market Structure Shift, and the price may play around in these zones. Put simply, it undergoes retests and rejections.
Forecasting Price Fluctuations Using ICT Trading Strategy
Predicting price fluctuations is no walk in the park. You need to gain an in-depth understanding of the ICT Trading Strategy and the market structure. It will allow you to:
- Spot displacement and Fair Value Gaps
- Identify Optimal Trade Entries
- Engage in balanced price ranges
- Stay alert during market structure shifts
Remember, successful trading is about practice and tweaking strategies to the existing market conditions.
And here’s a nifty tip: keep a Trading Journal handy. It will allow you to jot down notes, track progress, and gain clarity. You can also auto-import your trade and filter them per your preferences.
If you seek to further your trading efforts, try using an analysis tool. It provides you with comparisons, detailed reports, and statistics to identify areas for improvement. How cool is that?
Does ICT Trading Strategy Deliver Profitable Results?
The ICT trading strategy delivers profitable results for some but not all traders. The thing is, learning a trading strategy is often perceived as subjective. This means each trader will have a unique journey. For instance, trader X’s results may differ from Trader Y’s.
Yes, an ICT Trading Strategy can be effective. However, it requires consistent tweaking, testing, and dedicated study over several months.
For a quick reality check, you cannot expect overnight results by simply copy-pasting the strategy tactics.
Wrap Up
ICT Trading may feel unfamiliar to traders accustomed to traditional technical analysis. However, there’s a good reason this strategy is catching on.
Fundamentally speaking, markets thrive on price action and trends, and crucial levels play a role in determining when and why prices decide to make a U-turn.
Overall, trading always involves risks, and ICT Trading is no different.
Make sure you gain a solid understanding of the market structure, take calculated risks, and continuously adapt.
So, while ICT trading does work, the success – more or less – lies in the tactics the trader implements.
FAQs
Is ICT a Good Trading Strategy?
The ICT trading strategy generally maintains an attractive risk-to-reward for traders. However, its overall effectiveness depends on the individual traders and their preferences. Put simply, a few may succeed with its market structure analysis, while others may prefer alternate approaches.
How Can I Learn ICT Trading?
The first step to learning ICT Trading is to access resources offered by Michael J. Huddleston. They will provide you with the fundamental knowledge of ICT trading. You can easily access these resources through online platforms.
Do ICT Concepts Work In Crypto?
The ICT concepts can be used in the cryptocurrency market. However, the traders must know its unique characteristics and tweak their strategy accordingly, primarily because the crypto market is highly unpredictable. Besides, it operates round the clock, which presents a continuous challenge to identifying trading opportunities.
Are SMC and ICT the Same?
While closely related, ICT and SMC (Smart Money Concepts) aren’t the same. ICT mirrors Smart Money’s trading behavior and emphasizes market structure analysis. Contrarily, SMC focuses explicitly on understanding and tracking Smart Money’s moves. Yes, ICT applies a few SMC concepts within its strategy, but it doesn’t mean they’re the same.
All the information made available here is generally provided to serve as an example only, without obligation and without specific recommendations for action. It does not constitute and cannot replace investment advice. We therefore recommend that you contact your personal financial advisor before making a purchase decision.
