Transcription
So you've heard about ICT and you want to know a little bit more about it, right? You've heard all of these terminologies floating around the internet, but it seems like a foreign language and it seems very complicated. In this video, I'm going to break down essentially what ICT concepts are and really deliver it in simple terms. I promise, by the end of this video, you will have a much clearer understanding to ICT concepts.
So, what is ICT? Essentially, ICT is a trading concept and it's based on the idea of computer algorithms that dictate market price. But the books teach us that the markets move on buying and selling pressure, right? It's Bulls versus Bears, and if there are more buyers, the market goes up, and if there are more sellers, the market goes down. We're taught that the market makers flood money into the markets by pressing buttons. And although that used to be the case, this isn't how it works anymore.
You see, since a dawn of AI and the advancement of technology, it became more efficient to run the market on computer programs or AI. And this is done in the form of algorithms. Now, I know this is a controversial subject, especially in the trading community, but it should be of no surprise that the largest industry in the world is controlled by algorithms. Pretty much every sector that you can think of, in every industry, there are some form of algorithms working behind the scenes. Social media, for example, this video that you are watching is only being delivered to your feed through an algorithm based on your interests and previous videos that you have watched, right?
So, what is an algorithm? Well, to put it simply, it is a series of inputs that are put inside of a computer program, which then translates that information to an output. So, what does the algorithm do? Well, its main purpose is really to manipulate price, and it does this to induce liquidity into the marketplace, right? It does this by playing on human psychology and emotion. Now, this is very important because understanding human behavior and the characteristics that we possess within the marketplace is an essential part of how the algorithm was coded. You see, it was coded based on emotions such as fear, greed, FOMO, and impulsiveness, with greed being the biggest factor, in my opinion. And this is exactly why trade psychology plays such a huge part of any trader's career. When you understand that the markets have been programmed based on human psychology, it puts you at a psychological advantage because you know that there is manipulation in these markets that feed on human emotion since they have been coded that way.
But how does the actual algorithm move price? So, to keep it as simple as possible, we have in this case, input one and input two. This data is sent to a computer where a series of computations takes place that relays an output, right? Now, specific to these markets, in our case, we are looking at two inputs, which is time and price. These data points undergo a series of computations, which forms a macro. Now, a macro will take the inputs of time and price and specifies how those inputs are mapped to a specific output. In our case, the macros will determine where price is going to reprice to. There's only two things it will reprice to: an inefficiency or a high or an old low.
So, what is an inefficiency? Well, if we take this example over here, we can see that we have a three-candle formation. From this wick low to this wick high, we have price delivery here, which is all one-sided. This is sell-side delivery. Now, this is inefficient price delivery, and thus is called a fair value gap or, in this case, a CB-IR, a sell-side imbalance, buy-side inefficiency. Now, the reason this is known as a fair value gap or a sell-side imbalance is because the algorithm is coded on principles of fair value, and these parameters must be met in order for the algorithm to remain efficient. So, what do I mean by that? Well, if sell-side delivery is offered through this candle, the algorithm will need to reprice to offer buy-side back through this range, right? Inside of the wicks, we have both buying and selling, this back and forth up and down movement. However, in between the wicks, this is all sell-side delivery. The algorithm will reprice back through this range in order to deliver efficient price delivery. When price moves away from this area, this range now becomes balanced, and we call this a balanced price range, and fair value has now been offered inside of this range.
So, why highs and lows? Well, in this example, we have a consolidation. You can see the highs of these two candles. These are referred to as equal highs, or in retail terms, these will be a double top, right? Now, the books teach us to place stops above these equal highs, and below the market, we have these equal lows. Again, we're taught to place our stops below these equal lows or this double bottom, right? Well, what the algorithm is doing here is it's engineering liquidity above the market and below the market in the form of buy stops and sell stops. The algorithm will reprice to levels of liquidity where smart money are able to pair those orders. Now, I am planning on doing a whole separate video for this, so click the subscribe button and hit that notification bell. You don't want to miss that one.
So, let's discuss our first input, price. Now, a candlestick will give us a wealth of information, and there are specific parts of the candlestick that we want to pay attention to. These parts are going to be the open, the high, the low, the close, and the midpoint of a candle. I generally use the midpoint of the body, but there are conditions where we can use the whole wick to wick. Now, each of these levels are going to give us specific price levels. Now, these levels are specific data points. Once price has been printed, the algorithm will refer back to these data points and will utilize this information when creating a macro. Now, obviously, these data points will be based on the Y axis, since price moves up and down, right?
The second input that we have is time. Now, since price is on the Y axis, time will be across the bottom on the X axis. So, how does this all fit together? In this example, we have a higher time frame trend, which is bullish, so we are expecting higher prices. We have an old high to the left of the chart where buy-side liquidity resides. Above that level, we will have its own specific data point, in this case, 1.250. We have seen price travel higher, sweep above the old high. We then see price consolidate, engineering liquidity above the consolidation and below the consolidation. Since the algorithm has met its objective by repricing above this old high, the algorithm has now gone into a consolidation, waiting for another instruction. This instruction will come inside of a time window. Since we have swept the buy-side liquidity above this old high, inside of the range, we have an area of inefficiency. So, from this candle's low to this candle's high, we have only buy-side delivery offered through this range. Once the time window opens, price drops lower, sweeping the sell stops below the consolidation and rebalancing this inefficiency. Again, if you are familiar with my work, I often use the analogy killing two birds with one stone. Since we have liquidity residing below these lows and we have an area of inefficiency below the market, this is going to be a strong draw for the algorithm to reprice to. Price has now dropped into a data point of 1.150. Once this data point has been hit, we now have an alignment of time and price. This allows for a macro to form where we have both variables of time and price aligning, allowing the macro to send instructions to the algorithm to reprice higher. The market will then reprice higher, but above the consolidation where we had our buy-side liquidity resting. In this case, we have moved from inefficiency to liquidity. The algorithm will use data structures called arrays in price, which will act as ladders to take price from an inefficiency to the liquidity pool and vice versa, from a liquidity pool to an inefficiency, and this is all influenced by time.
So, what are arrays and which time windows? Now, this will be taught in future lessons in more detail, but for the meantime, I have created a free ebook which explains the different types of arrays and time windows that the market operates within. This is a fantastic resource for anybody who's new to ICT, so I strongly recommend that you download that. I'll leave a link in the description, and hopefully, I will catch you again in the next video. Thank you for watching. Take care, guys.