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2022 ICT Mentorship Episode 5
The Inner Circle Trader
Overview
This video explains intraday trading strategies for index futures, focusing on understanding the daily price range and identifying high-probability trading opportunities. It covers essential concepts like contract expirations, rollover periods, and the importance of liquidity. The core of the lesson involves defining specific trading windows within the New York session (8:30 AM to Noon, and 1:30 PM to 4:00 PM), avoiding the lunch hour (Noon to 1:00 PM). The presenter emphasizes identifying significant swing highs and lows before the trading day begins and around 1:30 PM to anticipate "stop hunts" or liquidity grabs, which often precede significant price movements. The strategy focuses on recognizing displacement and fair value gaps as key entry signals, advocating for a systematic approach over high-frequency scalping.
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Chapters
- Index futures like E-mini S&P (ES), Nasdaq (NQ), and Dow (YM) have specific symbols and expiration months (March, June, September, December).
- Contracts expire on the third Friday of their delivery month; traders should switch to the 'next month out' contract before expiration.
- The 'front month' or 'nearby' contract is the one with the largest open interest, indicating higher liquidity, which is preferred for trading.
- Monitoring open interest helps determine when to 'roll over' to the next contract month, typically a week before expiration.
Knowing contract details and rollover procedures ensures you are trading the most liquid contract, which is crucial for efficient execution and avoiding trading expired contracts.
Using barchart.com to identify the S&P 500 E-mini contract with the highest open interest (e.g., June contract over the March contract) to ensure trading liquidity.
- The primary trading timeframe discussed is the 15-minute chart for identifying key highs, lows, and imbalances like fair value gaps.
- Trading activity is structured around New York local time: the morning session runs from 8:30 AM to Noon, followed by a mandatory 'no-trade' lunch hour (Noon to 1:00 PM).
- The afternoon session begins after 1:00 PM, with a key algorithmic driver often starting around 1:30 PM.
- The goal is to frame the day by understanding the morning trend (bullish or bearish) and anticipating potential continuation or reversal in the afternoon.
Establishing specific trading windows and respecting the lunch hour helps traders focus their attention on periods with higher probability setups and avoid volatile, unpredictable price action.
Placing vertical lines on a TradingView chart at 8:30 AM and Noon (New York time) to delineate the morning trading session and the lunch break.
- Prior to 8:30 AM, identify the most significant swing high and swing low on the 15-minute chart; these levels represent potential areas of buy-side and sell-side liquidity (stop orders).
- A 'stop hunt' or 'liquidity grab' occurs when price briefly moves beyond a previous swing high (to trigger buy stops) or swing low (to trigger sell stops).
- Patterns like 'three drives' (three consecutive higher highs or lower lows) can signal an impending stop hunt as they create visible swing points.
- Displacement is key: after a stop hunt, price should move decisively away from the violated level, indicating a strong directional bias.
Understanding that swing highs and lows act as magnets for stop orders allows traders to anticipate where the market might 'hunt' for liquidity before a significant move, providing high-probability entry opportunities.
Observing price trading slightly above a previous swing high before sharply reversing downwards, indicating a stop hunt that swept buy-side liquidity.
- After a stop hunt and subsequent displacement, look for a 'fair value gap' (FVG) – a three-candle pattern where the middle candle's range is not fully covered by the outer two.
- If price retraces back into the FVG after a bearish stop hunt, it presents a short-selling opportunity.
- Conversely, if price shows displacement higher after violating a swing low, look for an FVG to form on the way down, presenting a long opportunity.
- The strategy prioritizes these two patterns (displacement followed by FVG entry) over other complex indicators.
Fair value gaps represent inefficiencies in the market that price often returns to fill, providing precise entry points after initial liquidity has been targeted.
After a stop hunt above a prior high, price drops sharply, creating a gap between the high of the first candle and the low of the third candle; a short entry is taken when price re-enters this gap.
- The afternoon session, particularly after 1:30 PM, often sees algorithmic activity driven by 'Market on Close' (MOC) orders, leading to accelerated price movement.
- Look for a swing high or low to be violated after 1:30 PM, similar to the morning session's stop hunt logic.
- A violation of a swing low followed by a rally can initiate a 'buy program,' where algorithms continuously push prices higher.
- The goal is to align with the expected daily range expansion, either higher or lower, and capture the move into the market close.
Understanding the afternoon's algorithmic drivers and patterns allows traders to participate in potential range expansion and capture significant moves leading up to the market close.
Observing a violation of a swing low after 1:30 PM, followed by aggressive buying pressure and a sustained move higher into the closing bell.
- The same principles of identifying swing lows, stop hunts, and fair value gaps apply to other index futures like the NASDAQ.
- Relative equal lows often act as support and can be targeted for sell-stop runs.
- The strategy emphasizes precision and patience, aiming for one or two high-quality trades per day rather than scalping numerous small moves.
- Sound risk management, including stop losses and proper position sizing, is critical due to the high volatility and leverage in futures markets.
Consistent application of these principles across different but related markets, coupled with strict risk management, builds a robust and sustainable trading approach.
In NASDAQ, identifying relative equal lows, seeing price dip below them (a stop hunt), and then looking for a long entry opportunity as price rallies, potentially using a fair value gap.
Key takeaways
- Trade the most liquid contract month by monitoring open interest.
- Structure your trading day around specific New York time windows (8:30 AM-Noon, 1:30 PM-4:00 PM) and avoid the lunch hour.
- Identify significant swing highs and lows before the trading day and after 1:30 PM as potential targets for liquidity grabs (stop hunts).
- Look for price displacement away from a stop hunt level, followed by a fair value gap, as a primary entry signal.
- Focus on capturing larger daily range expansions rather than numerous small intraday trades.
- Understand that market manipulation exists, but by recognizing patterns like stop hunts and fair value gaps, you can trade alongside institutional order flow.
- Strict risk management is paramount in volatile futures markets.
Key terms
E-mini S&PE-mini NasdaqE-mini DowExpiration DateFront Month ContractNext Month OutOpen InterestLiquidityStop HuntSwing HighSwing LowDisplacementFair Value Gap (FVG)Market on Close (MOC) OrdersDaily Range
Test your understanding
- How does monitoring open interest help in selecting the correct futures contract to trade?
- What are the key time windows for trading intraday, and why is the lunch hour avoided?
- What is a 'stop hunt,' and how can identifying swing highs and lows help anticipate one?
- Describe the process of identifying a trading entry using displacement and a fair value gap.
- How do Market on Close orders influence price action in the afternoon session?