Trading In Consolidations

Date: 2024-12-28

[00:15] Welcome back, folks, to lesson four of the May 2017 ICT Mentorship, ICT Amplified Day Trading and Scalping. This teaching is about trading in consolidations.

Okay, what's the secret behind trading consolidations? The first thing you need to understand is the focus on the daily and/or 4-hour order flow subordination. What is order flow telling you on a daily basis? On the daily chart, is price suggested to go higher based on IPDA and order flow, or is it most likely going to go lower? The 4-hour chart is your last line of defense in terms of determining directional bias.

Higher-Timeframe Order Flow

[01:04] Preferably, you want both the daily and 4-hour charts suggesting higher prices or both suggesting lower prices, and then you're looking for consolidations in price on a lower time frame.

In other words, we could be looking at a consolidation on an hourly chart or a 15-minute time frame. That may be a buildup of new positions, or it could be a buildup of orders that we then look to fade with a rejection—basically a Turtle Soup.

But when it comes to consolidations, I want you to think in two camps.

[01:43] First, understand what retail traders are thinking, then try to do the opposite in your own trading and align yourself with what Smart Money does.

Retail traders are going to be looking for breakouts to establish directional bias. They have no insight into what the market may already be telling them. They're looking for cause and effect: “If it does this, then I'll understand that.” But basically, they're chasing price.

Smart Money will engineer or fade breakouts of a consolidation. Smart Money is not trying to follow price.

Breakouts at Liquidity Levels

[02:22] It's going to allow price to trade to a specific level. When price trades to a specific key level, a liquidity reference point, or a PD Array, and that happens to coincide with a breakout of a consolidation, many times you're going to see a lot of institutional sponsorship behind the move that fades that very breakout.

Retail traders buy the previous low and sell the previous high. That's in keeping with the traditions of technical analysis, or what is known as classical support and resistance.

[03:06] Obviously, we've seen many instances where support and resistance aren't limited to just the actual old low and old high.

Liquidity rests just above an old high or below an old low, which brings us to the Smart Money perspective: buying under an old low and selling above an old high when markets are in consolidation.

Understand that the consolidation itself is permitting the open float, which is the buildup of orders above and below current market action. If markets are trading in a consolidation, you want to be looking above short-term highs and below short-term lows for where the buy stops and sell stops would be resting.

Open Float Around Ranges

[03:57] That's your open float.

When the market moves in a consolidation, the longer that sideways consolidation persists, the more orders they're allowing to build up.

Obviously, as a day trader, we're not expecting a very long phase of consolidation. It can be rather brief. But inside that consolidation, we have to understand what's being permitted.

Orders are being allowed to stack up in the form of breakout orders, trailed stop-loss orders, and stop orders that would trigger an entry—for instance, buying on a stop for strength and selling on a stop for weakness.

[04:34] All of those ideas overlap and create a great deal of near-term open float.

In other words, the open interest above the marketplace starts to concentrate, the open interest below the marketplace starts to concentrate, and you end up with a lot of liquidity basically bracketing market price.

When we look at the daily and/or 4-hour order flow and the subordination to that in terms of price action, whenever consolidations occur, the direction of the daily or 4-hour order flow is most often going to be the direction of the eventual move outside the consolidation.

[05:16] So if price moves above the consolidation, takes out an old high, and the daily and/or 4-hour order flow is bearish, that's usually going to be the best scenario for trading the consolidation.

If the daily and 4-hour order flow is bullish, any move below the consolidation would be viewed as Smart Money accumulating the sell stops for a move higher.

If the daily or 4-hour order flow is bearish, any move above the consolidation and above an old high is going to be viewed as Smart Money knocking out buy stops and accumulating short positions.

[05:53] The opposite is going to be seen with the retail crowd. They're basically going to chase price.

Retail traders chase expansions that originate from equilibrium, and Smart Money fades expansions that originate from equilibrium.

Now let me explain this a little more clearly.

When the market is bearish on the daily or 4-hour chart in terms of order flow, that subordination factor is going to be seen on the lower time frame charts. If there's a consolidation and price starts trading higher away from the equilibrium price point, and then breaks a short-term high, retail traders will many times view that as bullish.

[06:44] They're going to look for expansions, usually ABCD-type movements.

Smart Money does not see that. They fade it and go in the opposite direction.

So any short-term high that's broken, as price moves away from the equilibrium price point or middle of the consolidation, they fade that as a short-term stop run and then send price to the opposite extreme of the consolidation and just outside the consolidation range.

Again, retail thinks in terms of old high as classical retail resistance and old low as classical retail support.

[07:24] We're more focused on the equilibrium price point because we understand premium and discount, not simply what price did at an old high or low.

Because we understand that if price turned at an old high, liquidity can be resting just below that high in the form of a Bearish Order Block, or price can go above that high for the liquidity resting there in the form of buy stops.

With equilibrium, we want to see price moving and expanding away from it.

Now, if the daily or 4-hour chart is bearish—

Fading Breakouts With Bias

[08:00] —and the lower time frame price action is subordinate to that order flow, then during consolidations, any rally away from equilibrium that breaks a short-term high is something we're going to look to sell short.

Retail is going to view that as a break in structure, if you will. For folks who trade patterns, they're going to see things that, in their minds, indicate an ABCD correction to the upside.

If daily or 4-hour order flow is moving lower, as we understand it, and we see an expansion away from equilibrium or the middle of the range that breaks a short-term high, that is our sell scenario.

[08:44] We're looking for the opposite end of the range—the old low or retail support. That's what's going to be targeted next, and then price can move below it.

The opposite is true when price is expanding downward away from equilibrium.

When order flow on the daily or 4-hour chart is bullish, if we see a short-term low broken on an expansion away from equilibrium, we do not see that as a break in structure for lower prices. We see it as a sweep on sell stops to accumulate new longs, and then they're going to run for the other end of the consolidation or just outside it for the liquidity resting in the form of buy stops.

Pair that out.

[09:20] Conceptually, that's what some of these scenarios look like.

We have price moving away from equilibrium all the way up and outside a consolidation. We're going to be referencing old highs and old lows, whatever that defined range happens to be. We're simply defining it in classical support-and-resistance terms here.

Whenever you see price in a clearly defined consolidation and price rallies above that consolidation while the daily and/or 4-hour order flow is bearish, retail traders are going to see that as a bullish breakout and they'll want to buy it.

[10:04] That buying, if they're surging into the marketplace as buyers, creates the perfect opportunity for us as counterparties while mimicking Smart Money.

Smart Money is going to be selling that breakout when the daily and/or 4-hour order flow is bearish.

So we want to see consolidations and a rally outside that consolidation to entice retail or less-informed traders to buy, thinking they're buying strength, while the higher time frame daily or 4-hour order flow causes the lower time frames to remain subordinate to those higher time frames.

[10:40] So we're going to do the same thing as Smart Money. We're going to be selling those breakouts from consolidations.

When the daily or 4-hour order flow is bullish and price breaks down below the consolidation, retail traders are going to see that as a break in structure. They're going to see it as weakness and look to sell short on that weakness.

Retail traders are trying to sell that move as a breakout entry or short position. Smart Money will see the opposite if the daily or 4-hour chart is showing bullish order flow.

[11:18] When we see a break below an old consolidation, we understand that as an accumulation of sell stops, providing the liquidity necessary to pair up orders to go long.

Now inside the range or consolidation, when the daily or 4-hour order flow is bullish, what I like to anticipate is traders seeing an old low that produced a short-term bounce.

When price trades back down to that same equal low, they're going to buy there. And guess where they're going to put their stop loss? Just below that previous short-term low.

[11:53] So when retail traders see this, they're treating the old low as classical support.

Classical support-and-resistance theory doesn't work the way they think it does. That's exactly what we anticipate seeing.

Then, when price trades down below that previous low and outside the consolidation, that's where we're looking to be a buyer.

We're buying into those sell stops when, again, the daily and/or 4-hour order flow is bullish. That creates our low-risk, high-probability entry.

When we have these conditions, we're initially looking for price to return back to equilibrium.

Equilibrium as Initial Target

[12:32] We do not always anticipate or hold for the opposite end of the consolidation. We don't know if that's going to happen. We have no idea whether that move is going to occur with any validity.

We simply take the move back to equilibrium because, while price is in consolidation, it's always going to want to gravitate back toward the mean.

Equilibrium is the middle of what we deem to be fair value.

So whenever we're in consolidations, anticipate price expanding away from equilibrium and outside the consolidation. Many times, it'll then snap back up into the middle of the range or return to equilibrium.

[13:11] If the daily or 4-hour order flow is bullish here, even if price is eventually going to bounce lower after reaching equilibrium, many times this move itself will provide an opportunity to get long and participate in a tradable rally.

The opposite is true when the daily or 4-hour order flow is bearish.

If price trades back up to an old high while inside a consolidation, retail traders are going to see that old high as classical resistance. Classical support-and-resistance theory is going to be in operation. They're going to sell short right there, and you already know what they're going to do with their stop.

[13:45] Their buy stop is going to be placed just above the previous high inside the consolidation.

They have no understanding of order flow. They have no understanding of how markets build liquidity around specific price levels, and they have no appreciation for how that liquidity is sought after in price.

So when retail traders see this as their entry point, we're anticipating that behavior and the buildup of buy stops just above the previous high.

We wait for that. We exercise patience. We're looking for the consolidation breakout above the previous high.

[14:23] When that happens, we're doing the same thing Smart Money does by selling above that high and scooping up those buy stops that retail traders or less-informed traders are going to place there, because there will be a buildup of buy-side liquidity.

When price trades up there, it permits an opportunity for short sellers at the bank level to pair up their shorts with the obvious level of buy stops resting above that previous high.

When the daily or 4-hour order flow is bearish and we see price moving higher away from equilibrium, then breaking a short-term high, retail traders are going to see that as a break in structure.

They're going to look to buy, go long, look for an ABC-type formation, and expect strength in that particular market.

[15:16] Smart Money, on the other hand, sees that as an opportunity to sell into the expansion because, again, the lower time frame charts are going to remain subordinate to what's being dictated by the daily and/or 4-hour chart.

So if we're seeing bearish order flow on the daily and 4-hour chart and price is in a consolidation, we have to identify where equilibrium is and then look for short-term highs just above equilibrium followed by a rally above those highs.

Many times, that's going to present the ideal entry point for shorts.

Bearish Buy-Stop Run

[15:49] Once that short-term high is broken, that's an accumulation of buy stops.

So if they're going to run the buy stops in a daily or 4-hour bearish environment, that's where we look to go short.

We then aim for the liquidity resting below the previous low that creates the consolidation support.

We're going to pair up our buying to cover the short with those individuals who have sell stops resting below an old low—all facilitated by a run on buy stops above a short-term high that formed just above equilibrium, where we sold into those willing buyers.

[16:33] So what we're doing is pairing orders just like Smart Money does at the bank level, using institutional order flow from the daily and/or 4-hour chart.

When the daily or 4-hour order flow is bullish, retail traders are going to see a sell opportunity in their minds when price expands lower and breaks below an old short-term low.

They're going to see that as a break in support, a break in market structure, and an opportunity to sell short on weakness. They'll then look for continuation or a breakdown in that particular market.

[17:08] We anticipate that very behavior, and when they do it, we're going to fade the entire move.

That move breaking the short-term low is something retail views as an opportunity to sell short. Again, they're selling weakness.

That's an opportunity for us to fade that and do the exact opposite.

Smart Money, on the other hand, when they see that short-term low in an environment where the daily or 4-hour order flow is bullish, they see it as a run on sell stops.

That short-term low is building up a liquidity pool of sell stops that would create an immediate injection of selling liquidity.

Bullish Sell-Stop Run

[17:52] Why would they want selling liquidity? Because they need to buy the market long.

Their counterparty is going to be that run on the short-term low, or that expansion away from equilibrium.

When the daily or 4-hour order flow is bullish, what we're looking for is this particular condition right here: price comes down, snaps back up, and runs short-term sell-side liquidity.

They use that sell-side liquidity as counterparties to buy long.

When that occurs, we anticipate a move outside the consolidation to pair up their orders with the buy stops resting above the old consolidation high.

[18:31] So what we do here is the same thing the bank traders do.

We anticipate it and use the generic price-action characteristics inside a consolidation that retail traders simply don't think about.

They don't think about price this way. They think about selling weakness and buying strength, and they have no understanding of fair value or how to use equilibrium.

So now, when we look at price action on lower time frames for day trading—and on higher time frames as well—we ask whether the daily or 4-hour order flow is bullish or bearish.

[19:06] Are we respecting a Bullish Order Block? Are we reaching up toward a premium PD Array? That means we're going to be bullish.

That means the consolidations we're seeing here provide a pattern we'd like to see for our day trades.

That short-term low could, in many cases, be the Asian session low, or it could be a previous day's low.

Either one of those scenarios can create a wonderful opportunity to get long as a day trade.

Everything I just said here can be reversed for going short.

[19:40] So I want you to think about the fact that when markets go into consolidation, there are some very generic characteristics that we look at—or at least I do as a trader—and they help me build an idea.

But it all stems from the subordination that price is going to maintain relative to the daily and 4-hour directional bias based on institutional order flow.

By using what the PD Array Matrix is suggesting is presently in play—a discount or premium market—we use the PD Array Matrix to determine the levels price is reaching for.

That's our directional bias.

[20:18] So if we have that directional bias derived from the daily or 4-hour chart, we have higher time frame directional bias on our side.

Then, inside any consolidation, we know which side of the marketplace we need to be working on.

Any short-term low that's violated below equilibrium, we're going to look to go long on that if the daily or 4-hour chart is bullish.

Any move below the old lows of the consolidation, we anticipate as a run on sell-side liquidity.

Why do they want to run the sell stops?

[20:48] Because they want to pair those sell orders with what they're buying.

So again, for day trades, we have to focus primarily on the daily and 4-hour charts to give us the high-probability directional plays and to show us how not to get beat up while trading consolidations.

We work on one side of the marketplace and seek liquidity the same way the banks do.

So until the next lesson, I wish you good luck and good trading.