ICT Mentorship - Core Content - Month 02 - Framing Low Risk Trade Setups

Summary

This tutorial focuses on teaching traders how to frame low-risk, high-probability trade setups by analyzing higher time frame charts (daily, weekly, monthly) to determine directional bias and institutional order flow. The strategy includes identifying key support and resistance levels on higher time frames and then refining those levels on smaller time frames (e.g., 15-minute, 5-minute charts) to minimize stop losses and reduce risk exposure. By utilizing this approach, traders can manage risk effectively while aiming for high rewards, even without day trading or using large stop losses.

Takeaways

• 😀 High probability trade setups are best framed using higher time frame charts to determine the directional bias and institutional order flow.
• 😀 Institutional players like banks typically analyze markets on daily, weekly, and monthly time frames, and aligning with these can enhance trade accuracy.
• 😀 Focusing on higher time frames helps to identify key levels of support and resistance, crucial for framing buy or sell ideas.
• 😀 You can lower your risk by refining higher time frame levels to lower time frame charts, reducing the exposure in terms of stop-loss placement.
• 😀 A higher time frame setup provides a larger context for the market, offering ample time to plan trades and adjust as necessary.
• 😀 Lower time frame charts, such as the 15-minute or 5-minute, help tighten the stop-loss, reducing the overall risk per trade.
• 😀 The risk-to-reward ratio can be significantly improved by refining setups from higher time frames to lower time frames.
• 😀 A practical example shows refining a trade setup on the Aussie Dollar, where stop-loss is reduced from 20 pips to just 8 pips while maintaining profitability potential.
• 😀 The key to successful low-risk setups is understanding price action and institutional order flow on various time frames, ensuring trades respond to levels effectively.
• 😀 By using smaller time frames like the 5-minute chart, traders can align entries closely with key support levels, achieving a risk-to-reward ratio of 1:3 or higher.

Q & A

Why is it important to use higher time frames when identifying trade setups?

Higher time frames provide a clearer directional bias and reveal institutional order flow, support, and resistance levels. These factors help frame a high-probability trade setup with a strong foundation, as large institutions often analyze markets on daily, weekly, and monthly charts.

What is the primary advantage of focusing on higher time frame charts for trade setups?

The primary advantage is that higher time frame charts give you a clearer view of the market structure and long-term trends, allowing you to make more informed decisions. These charts help identify key levels that are influenced by large institutions, which increases the probability of a successful trade.

How do higher time frame charts influence the overall trade risk?

Higher time frames have more influence on price movements, which means trades that align with these levels typically have a better risk-to-reward ratio. This allows traders to plan for lower-risk setups while increasing the chances of success by focusing on institutional levels.

What role does institutional order flow play in determining trade setups?

Institutional order flow refers to the buying and selling activity of large institutions and banks. By understanding where these entities are likely to place trades, traders can identify high-probability levels, such as bullish or bearish order blocks, to structure their trades accordingly.

What is the benefit of refining a higher time frame setup to a lower time frame?

Refining a higher time frame setup to a lower time frame allows traders to tighten their stop-loss and reduce overall risk exposure. By using smaller time frames, traders can find more precise entries and set smaller stop-losses while still maintaining the integrity of the high-probability setup.

What is meant by a 'bullish order block' in trading?

A bullish order block is a key price level, typically a down candle on a higher time frame, where institutional buying activity has occurred. This level is important because it suggests that price may reverse or move higher if it revisits that level.

How does reducing the stop-loss size affect the trade?

Reducing the stop-loss size limits the amount of risk taken on a trade. By refining entry points on lower time frames, traders can decrease the distance from the entry to the stop-loss, which helps in managing the overall risk exposure and potentially increases the risk-to-reward ratio.

What is the significance of a 3:1 risk-to-reward ratio in this strategy?

A 3:1 risk-to-reward ratio means that for every dollar risked, the trader aims to make three dollars in profit. This is considered a high reward-to-risk ratio, which is crucial for long-term profitability, especially when executing trades with smaller stop-losses.

Why is it important not to use ultra-tight stop losses without understanding price action?

Using ultra-tight stop losses without understanding price action can lead to premature stop-outs, as markets may naturally experience some fluctuation before continuing in the desired direction. A deep understanding of price action ensures that the trader can appropriately set stops at levels that have a higher chance of holding.

Can this strategy be used by traders who can't day trade or are restricted by time?

Yes, this strategy is ideal for traders who cannot day trade or are restricted by time, such as those with jobs or businesses. By using higher time frame charts and refining entries on lower time frames, these traders can still capture low-risk, high-probability setups without needing to be involved in intraday trading.