ICT Mentorship Core Content - Month 04 - Divergence Phantoms

Summary

In this lesson, the mentor discusses the importance of understanding momentum divergence, market maker traps, and liquidity engineering in trading. The mentor critiques the over-reliance on indicators, emphasizing that they reflect past data and do not predict market movement. Instead, the focus should be on price action and liquidity levels, where market makers manipulate retail traders' expectations. Using examples of price action, hidden divergence, and liquidity runs, the mentor demonstrates how traders can anticipate market moves by understanding institutional order flow, rather than solely relying on classic indicator-based strategies.

Takeaways

• 😀 Indicators are based on past data and have no real predictive value for future price action. They can often mislead traders into making false assumptions about price movements.
• 😀 The market makers are focused on liquidity, not indicators. They engineer liquidity runs to take out retail traders and position themselves accordingly.
• 😀 Divergence is a key concept in trading, with two types: Type 1 (classic) divergence, which involves a mismatch between price and momentum indicators, and Type 2 (hidden) divergence, which is trend-following in nature.
• 😀 Type 1 bearish divergence occurs when price makes a higher high but momentum does not, signaling a potential top. Type 1 bullish divergence is the opposite, where price makes a lower low but momentum doesn’t confirm it.
• 😀 Type 2 (hidden) divergence is trend-following and occurs when a higher low in price is accompanied by a lower low in momentum, providing strong momentum entry signals in bullish trends.
• 😀 Retail traders often look for classic divergence (either bearish or bullish) to predict reversals. However, this approach is flawed as it does not account for the market makers’ actual strategy.
• 😀 A proper understanding of liquidity and order flow is essential for successful trading. Market makers use liquidity runs to manipulate prices, forcing retail traders to buy or sell at unfavorable levels.
• 😀 In market analysis, focus on price action and order flow rather than just relying on indicators. While indicators can help identify potential scenarios, they should not dictate trading decisions.
• 😀 The market often goes against the retail trader’s expectations, especially when they rely on indicators to predict tops and bottoms. Market makers target areas of liquidity, not indicators.
• 😀 Traders should look for confirmation of price moves by considering both price action and momentum indicators. A shift in momentum in the opposite direction of what indicators show often signals an opportunity to go long or short.

Q & A

What is the main topic discussed in the script?

The main topic is focused on momentum divergence, phantom market maker traps, and the importance of understanding price action over relying on indicators in trading.

What is the difference between type 1 and type 2 divergence?

Type 1 divergence refers to a scenario where there is a higher high in price, but the momentum indicator fails to show a corresponding higher high, indicating potential bearish divergence. Type 2 divergence, or hidden divergence, occurs when there is a higher low in price, but the momentum indicator shows a lower low, which often signals a continuation in the trend.

Why does the speaker suggest avoiding over-reliance on indicators?

The speaker suggests that indicators, which are mathematically derived and based on past data, do not provide accurate predictions of future price movement. They only reflect what has already happened and often mislead traders by failing to account for market liquidity or institutional decisions.

How does market liquidity affect price movements?

Market liquidity plays a crucial role in price movement as market makers can manipulate liquidity to either draw traders into the market or remove them. By targeting specific price levels where liquidity is concentrated, they can induce price movements in the opposite direction to catch retail traders off guard.

What is the 'market efficiency paradigm' referenced in the script?

The 'market efficiency paradigm' refers to the idea that retail traders' indicators and thought processes do not influence price direction, but rather the market makers are aware of these thought processes and manipulate price action to take advantage of them, thus engineering liquidity runs.

What does the term 'hidden divergence' refer to in the context of the script?

Hidden divergence refers to a scenario in trend following where price forms a higher low, but the momentum indicator (like stochastic) forms a lower low. This often signals the continuation of the current trend, providing a powerful momentum entry point.

What is the main mistake retail traders make when interpreting divergence?

Retail traders often mistakenly interpret divergence signals, such as bearish divergence, as indicators of a top or reversal. They rely too much on the indicator without considering the underlying market conditions, leading them to misjudge price movements and enter trades prematurely.

How can understanding price action help traders avoid common pitfalls?

By focusing on price action, traders can better anticipate market movements and identify key liquidity zones where market makers might target. This allows for a more informed approach to trading, rather than simply relying on indicator signals that may not align with market intentions.

What role do institutional traders and funds play in shaping market movements?

Institutional traders and funds, which follow long-term trend-following strategies, often drive market movements by targeting liquidity in key areas. These traders are not concerned with retail indicators but focus on buy and sell stops to engineer price movements that benefit their positions.

What is the significance of the 'order block' theory discussed in the script?

The 'order block' theory refers to the idea that specific price zones, such as the last down candle before an up move, act as key areas where price will often retrace or consolidate. These order blocks represent regions where liquidity can be absorbed, and price action will often react when revisiting these levels.