Transcription
The dealing range is one of the most important concepts to master. So in today's video, I'm going to discuss the formation of a dealing range and more specifically how a type one dealing range forms.
Now a type one dealing range is a continuation profile and I'm going to walk you through step by step how it forms and how we can use this in our actual trading. So first I'm going to explain this conceptually and then I'm going to show you an actual chart example. But first, let's focus on a bearish dealing range.
In this rather crude diagram, we can see that we have a swing high here and we have a swing low here. Now, how does a swing form? Well, if we take the swing high, what we want to see is the formation of a three candle pattern where we have the middle candle being higher than the candle to the left and the candle to the right. And this is something that we refer to as a three bar swing. This is also true for a swing low formation where we have the middle candle here which is lower than the candle to the left and lower than the candle to the right forming this three bar swing.
Now, if we anticipate that the market is traveling lower from a higher time frame perspective, maybe it's reaching for a pool of liquidity below lows or relative equal lows below the market or an inefficiency in the form of a fair value gap that it's looking to repric to to rebalance. In an ideal scenario, we always want to see the market run higher. And essentially, the algorithm is designed to run against those who are making money. And it will do this in the form of manipulation.
Now, retail stops will be residing above an old swing high to the left. The market will repric higher, raiding that pool of buyside liquidity. Once we see this happen, then we should always anticipate a type one dealing range forming. But we need to wait for something. We need to wait for the market to repric lower below an old swing low. When this happens, we've now cleared the board of buy side liquidity and sellside liquidity like so.
Now, what we want to see happen is another three bar swing formation which confirms the formation of a dealing range low. Once this happens, we have the formation of a new dealing range high and a new dealing range low. And we can define this as a dealing range or more specifically a type one dealing range.
Once we have this information, we're then able to grade this entire range into quadrants where we can plot a fib tool from the dealing range high to the dealing range low. And this is what it looks like on the fib settings. The dealing range high will be our zero level. The dealing range low will be our positive one level. The 50 DRT level will be 0.5. The 25 DRT level will be 0.25. And of course the 75 DRT level will be 0.75.
Now that we have these levels plotted, what's important here to understand is that when the algorithm is looking at price, it sees this dealing range structure as reference points and high probability arrays will be printed around these reference points. And I refer to these as DRT levels. Now once we've defined these DRT levels, anything above the 50 DRT level, we can class this as a premium market and anything below this 50 DRT, we can class this as a discount market.
Now, I've explained this in a little bit more detail in other videos, so I won't retach all of that here. But what I will say here is that ideally, we want to see the market repric into a premium if we are to go short for a market continuation lower. And if you are fairly new to trading and fairly new to these concepts, I would always recommend that use that 50 DRT level as a filter and wait and do nothing until you see price get above that 50 DRT and then look for an imbalance or some form of PDR to the left.
But the market doesn't always go up to a premium. Sometimes it can get to this 75 DRT level and it can just drop lower. Now, there's going to be conditions when and where this happens, and I'll touch on a few of those towards the end of this video. Alternatively, the market can also go as far as that 25 DRT level, find some element of resistance here and then drop and continue lower.
Now, this will generally occur when we see the dealing range drop lower below the 50 DRT level and we can't see any highs form above that 50 DRT level. What will happen is the market will drop lower and it'll create a short-term high inside of a discount and then find the dealing range low. Now, generally what will happen in this case, we'll see a much more violent retracement higher where we get up to the 25 DRT level.
If we see the market repricing steps like this and we see that we've had short-term swing highs above equilibrium or that 50 DRT level and we can see that there's no inefficiency. So prices fairly balanced as it drops into its discount range then we're less likely to see the market really run higher. Of course it can happen. It comes down to volatility and what sort of new drivers are present in the market. But generally, as a rule of thumb, if we see the market reprice quickly in one direction, it will usually repric quickly in the opposite direction. And that's when you will generally see price run towards the extremes of a dealing range.
Now, I'll discuss extremes and discounts in a type three dealing range in a future video, but for now, let's see how this looks like on an actual chart. Again, here you can see that we have this example of price action over here where we've raided a swing high here and then we've dropped below a short-term swing low here. Now, what this does is it forms our dealing range. So, we can then grade this dealing range from the dealing range high down to the dealing range low and find our DRT quadrants.
Let's bring in a bullish example here. Again, same scenario where if we are anticipating higher prices, we want to see the market drop lower first below an old short-term swing low to the left. We then want to see the market turn around here and repric higher back above a swing high. This will again set our new dealing range where we have a clear defined dealing range high and a clearly defined dealing range low. Once we have this dealing range, then we can grade this dealing range and set our DRT levels.
Now, the only difference here is since we're plotting from low to high being a bullish dealing range, we can use the same fib levels, but our dealing range low in this case will be zero and our dealing range high will be positive one.
Now looking at this on again an actual price chart with this piece of price action in front of us. We have our high up here where we have our three bar swing. Now every time we break a new low, all we're doing is we're extending the dealing range low. So we keep that dealing range high there and we extend the dealing range low. As that dealing range low gets broken here, we just extend the dealing range lower. When this dealing range low gets broken here, we just extend the dealing range lower. That dealing range high stays in place.
Now, if we were in a bearish climate and we were using the 50 DRT level as a filter, we do nothing because price hasn't managed to get back into a premium range. And it's a very, very easy way for new traders to filter out higher quality setups. And this is the exact same framework that I used to use many years ago. But in this case, we are in a bullish type one dealing range where we're anticipating the market to run higher. So, we're anticipating the market to drop lower first below some old low to the left or an inefficiency below the market.
Now, what we're really waiting for here is we want to see a short-term swing low broken to the upside in all of this price action lower. So, we have a high here, but we fail to break above it here. We have a high here, but we fail to break above it here. Now, when we do break above the high, it's here. This is the first high inside of all of this price action that is broken to the upside. That's significant. As soon as that happens, we can now anticipate the formation of a new dealing range. We can still use this dealing range high and this dealing range low to give us information of how this new dealing range will form, but that's beyond the scope of this presentation and I will cover this in our type 2 dealing range foundation lesson.
But for now again since we are in a bullish climate, we now have a swing low and a swing high that has cleared some form of sellside liquidity to the left and we've swept above a swing high clearing buyside liquidity to the left. This gives us the formation of now a new dealing range where we can grade it from the dealing range high down to the dealing range low. Again, in an ideal world, we anticipate the market to drop into a discount below that 50 DRT level. If the market runs higher and makes a new swing high, then we do nothing. We just move the dealing range higher. The dealing range low stays in place. So, all we're doing is extending the dealing range. And if this is your model, then there's absolutely nothing wrong with that. It's actually a very, very good model. And I'm going to show you how powerful this actually can be.
Let's take this piece of price action over here. Now, I may have to zoom in here a little bit. We have an old sellside liquidity pool below an old swing low to the left, and we're anticipating bearish conditions for the market to repric back below this old low. In this case, we have a swing high formed here. And for the sake of time, let's say we've raided a buy sign liquidity pool to the left. We then have a swing low over here that we've swept below. Now, we have the formation of a new dealing range, right? So, we can plot this dealing range from the high down to the low.
If we look carefully here inside of this dealing range high and this dealing range low, we have a sellside imbalance here that sits above that 50 DRT level. So, we're inside of a premium market. Now, since we're anticipating lower prices because this sellside liquidity pool is going to be our draw on liquidity, all we have to do here is we just have to wait for price to retrace higher and back into a premium market. Note the reaction that we have at that 25 DRT level. And we also completely rebalance in that fair value gap. We have here a new dealing range high since we have raided all that buyside liquidity and now we have a new dealing range low since we formed this three bar swing. So we can plot our DRT levels on this newly formed dealing range.
Now it's not wrong in keeping the dealing range high. In fact, that is going to be the parent dealing range high. But we can trade smaller dealing ranges inside of the larger parent dealing range. And we can still use the DRT levels of a higher time frame to find high probability areas of where we can see short sells forming. If you see a higher time frame parent dealing range, DRT level overlap with a smaller fractal dealing range DRT level, then they're really strong areas to look for high probability setups.
Now, let's see what happens here. the market reprices higher above our 50 DRT level and into a balanced area. The bodies of the candles here are failing to close above that 50 DRT. Now, that's significant. If we're anticipating lower prices and we see this happen, what's it telling us? It's telling us that the market is heavy. It's in a hurry to spool lower. And this is really the feedback that we want to see in price action.
Now we have a new dealing range high and a new dealing range low since we have this very shortterm swing high over here traded above and then we've seen price trade back below an old low. Now watch what happens here. The market fails to get above equilibrium or our 50 DRT level. So what do we do here? Well, again, if you are new to these concepts and in your model, your rules state that the market has to repric above equilibrium before you can take shorts, then you do nothing since your rules haven't been met in this case. You just let the market run. And there's absolutely nothing wrong with that.
For those of you who have a little bit more experience with algorithmic price action, there are a few clues here to tell us why the market was never going to repric to a premium. Now, the first thing we can see is that there were clues here. We were seeing the bodies of the candles here really fail to gain any momentum or ground to the upside and we were really struggling to get back above that 75 DRT level. The other clue that we have here is again if we look closely we have an imbalance resting right at that DRT level and the bodies of the candles over here are all failing to close back above that fair value gap. Furthermore, we also have this imbalance above the market and it also overlaps with this down close candle where we have a swing high, a swing low and then a higher high. So this down close candle over here becomes what? That's right, a bearish breaker. That bearish breaker overlaps with our fair value gap. This is our unicorn model and it's a very very powerful algorithmic signature. I'm going to do a whole video on the unicorn model anyway. So again, make sure you like and subscribe.
Now, we see the market roll over and we form a new dealing range because we've seen price run above the short-term high and then sweep below the short-term low. Now, watch what happens here. The market runs higher, but before doing so, we create another swing low here. So, what do we do? Well, we just extend the dealing range low. We keep that same high. And then what happens here? the market really reprices higher since we had all this movement to the downside leaving an inefficiency at that 25 DRT level. The market then reprices higher and fills in that inefficiency. Again, notice the candles here, the bodies really struggling to get back above that 25 DRT level. And then we see price turn around and attack the lows below the market. Look at all the bodies here. Below that is going to be a really big pool of sellside sign liquidity. Now look carefully here. Can you see any swing high to the left that has been raided with this swing high? No. So all we do here is we extend the dealing range lower keeping that swing high intact.
Now this is where it gets interesting. from where we can currently see market price to the distance between our all sellside liquidity pool. We're in very much close proximity here. If you notice at that 75 DRT level, we have an imbalance that rests there. So, watch what happens here. the market really fails to get back above that 75 DRT level and it's all being held by that fair value gap that again rests at that 75 DRT level and then we really see the market turn around and raid that sellside liquidity pool. The truth is we can predict where this low is going to form right up here. In fact, we can predict inside of this range where the stages of distribution will form over here. We have our initial consolidation. Price returns to the consolidation over here. So, we anticipate some form of a retracement inside of a type one dealing range. The market then drops lower and gives us from this swing high to this swing low our first stage of distribution. The market then drops lower one more time. Now in our second stage of distribution which occurs over here at that 75 DRT level, we anticipate the market to really run for those sell stops below the old swing low. Why is that? because the algorithm does not want to let those traders off the hook who have their stops below that liquidity pool. So, it's going to really drive into that liquidity.
Now, I know that was maybe a little bit too advanced for a foundational teaching. I apologize, but I'm going to do a whole series on a lot more foundational teachings, including the market maker model, and hopefully find a way to help you fit all the pieces of the ICT puzzle together. But it all starts with the dealing range. If there's one concept that you should focus on above all of them is understanding the dealing range. If you do that, you'll be able to understand where your key liquidity pools are, your major and minor buy side, where your high probability arrays and fair value gaps are going to form. For my older students, this should really be giving you a lot of light bulb moments. for my newer students. Don't worry because again, like I said, I have a whole lot more foundational teaching on the way. So again, please like, subscribe, and I'll catch you in the next video.