ICT Mentorship Core Content - Month 03 - Market Maker Trap Trendline Phantoms

Summary

In this lesson, the instructor critiques the use of diagonal trendlines for identifying support and resistance in market analysis. Drawing from 24 years of experience, the instructor explains that trendline theory lacks a solid statistical basis and that market movements are driven by liquidity, not trendlines. Retail traders often fall into the trap of seeing trendlines as predictive tools, leading to false expectations. Instead, the video emphasizes focusing on institutional order flow and liquidity traps to understand market direction, urging traders to think beyond trendline-based strategies for better success.

Takeaways

• 😀 Trend lines, particularly diagonal support and resistance, are often misleading for retail traders, as they are based on subjective connections rather than solid market principles.
• 😀 Price does not recognize trend lines drawn by traders, as it only reacts to liquidity and large market orders, such as protective stop losses or entries.
• 😀 The concept of trend lines is flawed because it often creates false expectations, leading traders to think they have a reliable way to predict price movement.
• 😀 Trend lines are subjective because they rely on choosing specific highs and lows to connect, without any statistical edge to back them up.
• 😀 The market is driven by liquidity, and smart money (e.g., large funds, banks) manipulates price by creating liquidity traps, not by respecting trend lines.
• 😀 Retail traders often fall for liquidity traps at trend line levels, where they are misled into buying or selling at points with little real support or resistance.
• 😀 Price action often forms false trends around these trend lines, leading to misinformed retail traders entering trades that have a high probability of failure.
• 😀 Market makers use the fallacy of trend lines to their advantage by setting traps for retail traders, creating liquidity that they can capitalize on.
• 😀 The market does not adhere to the concept of trend line support or resistance because trend lines are based on past price data, which doesn't necessarily predict future price movement.
• 😀 It is crucial to focus on market liquidity, order blocks, and institutional order flow rather than trend lines, as these are the true drivers of price movement.

Q & A

What is the main concept behind trendline Phantoms or false trendlines?

The main concept behind trendline Phantoms or false trendlines is that retail traders often rely on diagonal support and resistance lines, which may appear significant but are essentially imaginary. These lines are based on past price movements, and traders attribute future price movements to them. However, the market doesn't inherently respect these lines, and they don't provide a reliable edge for predicting price action.

Why does the script suggest that price doesn't respect trendlines?

The script argues that price doesn't respect trendlines because it is driven by liquidity, not by the trendlines themselves. Liquidity comes from large pools of buy and sell orders in the market, such as protective stops or new orders from institutional players. Retail traders, who rely on trendlines, are too small for their actions to influence the price directly.

What does the term 'smart money' refer to in the context of the script?

'Smart money' refers to large institutional players or traders who have the resources and knowledge to move the market. These players control the market direction based on their order books and liquidity needs. The script emphasizes that understanding smart money and their behavior is essential for successful trading, rather than relying on trendline theory.

Why does the script argue against using diagonal support and resistance as a basis for trading?

The script argues that diagonal trendline support and resistance are subjective and unreliable because they are drawn from past price points that may not have any relevance for future price movement. The approach of using trendlines to predict support or resistance is too simplistic and does not account for the actual liquidity dynamics or the behavior of institutional traders.

How does the script explain market makers' use of trendline Phantoms?

Market makers capitalize on the fallacy of trendline Phantoms by trapping retail traders who are following trendline-based setups. When retail traders buy at what they perceive to be trendline support or sell at trendline resistance, market makers use these moments to manipulate price, creating liquidity by running the stops of retail traders before reversing price direction.

What is the significance of the 'third touch' of a trendline mentioned in the script?

The 'third touch' of a trendline refers to a point where price revisits a previously established trendline for the third time. Retail traders often view this as a confirmation of the trend and an opportunity to buy at support or sell at resistance. However, the script highlights that this third touch is often a trap, as market makers will manipulate price to take out stops or trigger liquidity.

What is the concept of a 'turtle soup' trade in the script?

A 'turtle soup' trade refers to a strategy where price momentarily breaks a trendline or a key level, triggering stop losses from retail traders, and then reverses sharply in the opposite direction. This strategy takes advantage of the liquidity created by retail stop orders, allowing larger traders to capitalize on the reversal.

How does the script differentiate between retail traders' and institutional traders' approaches?

The script emphasizes that retail traders often rely on technical analysis tools like trendlines, which are based on subjective and historical price data. In contrast, institutional traders focus on liquidity and the flow of large orders, making their approach more grounded in actual market dynamics rather than technical patterns. Institutional traders are not concerned with trendlines, as they are focused on driving price based on order flow and liquidity.

What role do liquidity and order blocks play in the script's approach to trading?

Liquidity and order blocks are central to the script's approach to trading. Order blocks refer to areas where large institutional orders have been placed, creating zones of support or resistance that are more significant than trendlines. The script suggests that traders should focus on these liquidity-driven zones rather than relying on trendlines, as they represent the true market dynamics that influence price action.

Why is the trendline theory described as 'flawed at its core'?

The trendline theory is considered flawed because it relies on drawing lines from past price points to predict future price movements, a process that is highly subjective and doesn't account for market liquidity or the behavior of large institutional traders. The script argues that trading based on trendlines is essentially a 'chance' strategy, akin to flipping a coin, and does not provide a statistical edge for traders.