Episode 7: Identifying Power Of 3 & SMT - ICT Concepts

Summary

The video script from the 'Trading Den' module delves into the 'Power of Three' trading concept, abbreviated as AMD, representing Accumulation, Manipulation, and Distribution. It explains how these phases are pivotal in market movements, with a focus on identifying high-probability trading opportunities. The script also introduces the concept of 'SMT Divergence' between correlating assets like the NQ and ES, and how it can be combined with the Power of Three for effective trading strategies. Additionally, it discusses the significance of 8:30 and midnight price levels in determining daily market bias, offering insights into market behavior and trading setups.

Takeaways

• 📊 The 'Power of Three' (A=Accumulation, M=Manipulation, D=Distribution) is a market movement pattern that traders can use to predict price action.
• 📈 The Accumulation phase is characterized by consolidation, where the market prepares for a significant move.
• 📉 The Manipulation phase involves a price drop to trigger stop-loss orders, creating a displacement back within the trading range.
• 🚀 The Distribution phase is typically a quick reaction in the market, where price moves sharply in the direction of the overall trend.
• 🔍 Using higher time frame Price Discovery Arrays (PD arrays) in conjunction with the Power of Three can increase the probability of successful trades.
• 📝 The script provides examples of how to identify and trade the Power of Three pattern on various time frames, from one minute to four hours.
• 🔑 The concept of 'Turtle Soup' is mentioned, which involves using the Power of Three to identify entry points for trades.
• 🤝 The script introduces the concept of SMT (Smart Money Test) Divergence, which occurs when two correlating assets move differently against each other, indicating a potential trade setup.
• 📈 The importance of higher time frame PD arrays is emphasized for confirming trade entries and understanding market bias.
• 🕒 The significance of the 8:30 and midnight opening prices in determining daily market bias is explained, with strategies for trading in deep discount or premium conditions.
• 📉 The script suggests that being in a deep discount or premium can influence the direction of price movement, with the market gravitating towards the midnight open price if significantly deviated.

Q & A

What is the 'Power of Three' in trading?

The 'Power of Three' in trading refers to the three phases of market movement: Accumulation (A), Manipulation (M), and Distribution (D). It's a pattern that traders use to understand and predict market behavior.

What is the Accumulation phase in the context of the 'Power of Three'?

The Accumulation phase is the first stage of the 'Power of Three', where the market consolidates and buyers accumulate positions, often after a move down and a quick return to the trading range.

Can you explain the Manipulation phase in trading?

The Manipulation phase involves a move that triggers stop-loss orders, often causing a temporary displacement in price. It's a strategic move to dislodge weaker positions before a significant price movement.

What does Distribution refer to in the 'Power of Three' trading concept?

Distribution in the 'Power of Three' is the final phase where the market quickly moves in the intended direction, often after a manipulation phase, to reach the 'overall draw' or the target price level.

How can traders use the 'Power of Three' in conjunction with higher time frame patterns?

Traders can use the 'Power of Three' in higher time frames by looking for manipulation legs that occur within a higher time frame's Price Distribution Array (PD array), which can indicate high probability trades.

What is a Price Distribution Array (PD array) and how is it used in trading?

A Price Distribution Array (PD array) is a tool used to identify significant price levels or zones within a specific time frame. Traders use PD arrays to anticipate potential areas of price reversal or continuation.

How does the concept of 'SMT Divergence' relate to the 'Power of Three'?

SMT Divergence occurs when two correlating assets show a divergence in price action, such as one asset taking a new low while the other does not. This can be used in conjunction with the 'Power of Three' to identify high probability trading setups.

What is the significance of the 8:30 and midnight price levels in determining market bias?

The 8:30 and midnight price levels are used to determine the market's daily bias. If the market is trading below these levels, it is considered a 'deep discount', and if above, a 'deep premium'. This helps traders to understand the overall sentiment for the day.

How can traders identify a high-probability trading setup using the concepts discussed in the script?

A high-probability setup can be identified when the 'Power of Three', SMT Divergence, and higher time frame PD arrays align. For example, if there's an accumulation phase followed by a manipulation beneath a low within a higher time frame PD array, and an SMT Divergence, this can signal a strong potential for a price move in the intended direction.

What is the role of the Market Maker Model in trading strategies discussed in the script?

The Market Maker Model can be used in conjunction with SMT and the 'Power of Three' to understand and predict price movements. It helps traders to identify when the market is likely to move towards the 'overall draw' or the area where the majority of liquidity is.

How does the concept of 'displacement' work in the context of the 'Power of Three'?

Displacement in the 'Power of Three' refers to the price movement that occurs after a manipulation phase, which can be either higher or lower. It is a confirmation signal that the market is ready to move towards the 'overall draw' in the intended direction.