Identifying Fake MSS CHOCH and Retracements Updated

Summary

In this video, the speaker revisits and clarifies key trading concepts from ICT (Inner Circle Trader), focusing on identifying valid retracements and break of structure. The main idea centers around the three-candle rule, which ICT suggests for confirming retracements in an uptrend. The speaker also shares personal insights, highlighting exceptions to the rule based on market experience. Key concepts like market structure shifts, false entries, and fractal patterns are discussed, with a strong emphasis on precision in defining retracements and breaks of structure. This explanation is crucial for traders aiming to improve their technical analysis and market understanding.

Takeaways

• 😀 ICT explains that identifying a valid retracement requires at least three candlesticks closing lower than each other. A four-candle retracement is also acceptable, but three candles can be used as a rule of thumb.
• 😀 When determining a market structure shift or break of structure, it's crucial to confirm a valid retracement with at least three candles closing lower, not just two.
• 😀 A valid retracement is only established once three candles consecutively close lower than the previous one. If only two candles close lower, it’s not considered a retracement.
• 😀 An example was given where two candlesticks were not enough to establish a valid retracement, thus leading to a false market structure interpretation if not carefully analyzed.
• 😀 ICT emphasizes the importance of counting the correct number of candles to avoid errors in marking breakoffs and structure shifts.
• 😀 If a valid retracement is not confirmed, price movements are not considered a break of structure and could lead to incorrect trade decisions.
• 😀 An improper understanding of the three-candle retracement principle can lead to failed trades, especially when attempting to trade breakouts based on false structure shifts.
• 😀 The market structure shifts require the price to break previous lows or highs, followed by a retracement to a point of interest such as an order block or a fair value gap.
• 😀 While ICT suggests four candles for a retracement, the video creator prefers three candles, based on their personal trading experience and observation.
• 😀 The retracement and structure shift principles apply across various time frames, meaning that the same approach can be used for both lower and higher time frames, thanks to the fractal nature of price movements.

Q & A

What is a valid retracement according to ICT?

A valid retracement is defined by having at least three candlesticks that close below the previous one, indicating price movement in the opposite direction within an uptrend. ICT mentions that at least four candlesticks should close lower to confirm the retracement, but the speaker prefers three as a more efficient approach.

How do you determine if a market structure shift has occurred?

A market structure shift occurs when price breaks a previous low or high. In an uptrend, this would involve price taking out a previous low, signaling a shift in structure. This shift is confirmed once the price returns to a point of interest like an order block or fair value gap.

What is the significance of the three-candle principle?

The three-candle principle states that in order for a retracement to be valid, there must be at least three candlesticks closing below the previous one. This ensures that the retracement is substantial enough to confirm a break in market structure.

Can a retracement be considered valid with only two candlesticks?

No, according to the speaker, a valid retracement requires at least three candlesticks. Two candlesticks do not fulfill the conditions necessary to confirm a retracement in the market structure.

What happens if you mistake a non-retracement as a breakout structure?

If you mistake a non-retracement for a break of structure, you might enter a trade incorrectly, expecting price to continue moving in a certain direction. This can result in failed trades, as price might not respect the expected retracement level.

What is the risk of not understanding the retracement principle?

Misunderstanding the retracement principle can lead to errors in marking where there is a shift in market structure, resulting in incorrect entries and potential losses in trades. Accurate identification of retracements is essential for understanding market structure and break of structure.

Why is volume important in considering a retracement?

Volume plays a significant role in confirming retracements. In some cases, even one large candlestick with heavy volume may be considered a valid retracement, as it can demonstrate significant price movement in the opposite direction. This is based on the speaker’s personal experience, though ICT emphasizes using at least three candlesticks.

How does fractal market behavior apply to timeframes?

Fractal market behavior suggests that price patterns and principles repeat across different timeframes. This means that the same retracement and break of structure principles can be applied to both lower and higher timeframes, making them versatile for traders.

What is the danger of entering a trade without considering the three-candle rule?

Entering a trade without considering the three-candle rule can lead to entering a position prematurely, resulting in stop-outs. Without three valid candlesticks forming a retracement, the market structure might not have shifted as expected, causing the trade to fail.

What is the difference between a breakout structure and a retracement?

A breakout structure occurs when price breaks a previous high or low, indicating a potential shift in market direction. A retracement, on the other hand, is a temporary reversal of price movement, usually within an existing trend. A valid retracement requires at least three candlesticks closing below the previous ones, while a breakout structure signifies a change in the overall market direction.