37-ICT Mentorship Core Content - Month 4 - Divergence Phantoms

Last modified by Drunk Monkey on 2022-09-12 06:36
1 00:00:33,900 --> 00:00:42,270 ICT: Welcome back, folks, this is teaching seven of eight of the December 2016 content for the AC T mentorship. This teaching is going to be dealing
2 00:00:42,270 --> 00:00:51,210 specifically with momentum divergence phantoms, market maker trap. And I don't teach a lot about indicators, because they're mathematically derived and they
3 00:00:51,210 --> 00:01:00,870 measure the past. As a new trader, I used them a lot and had a lot of false hope placed on them. I like looking at them at certain points in price action,
4 00:01:00,870 --> 00:01:12,240 because I can see where I used to think price would go relative to a indicator. And I can tell you now it's a completely different paradigm shift that when we
5 00:01:12,240 --> 00:01:21,240 see price action, indicating that it wants to go higher, not looking at the indicator maintains the indicators don't tell you, it's probably stopping now or
6 00:01:21,270 --> 00:01:32,130 it's petering out, it's making its reversal. Or it's running out of momentum, if you will. The, the idea is the indicator is going to drive price as a retail
7 00:01:32,130 --> 00:01:39,930 trade. That's what we think. And it's not the case, the indicators don't have any reflection whatsoever about what the markets going to do next, price has no
8 00:01:39,930 --> 00:01:47,430 awareness of our indicators. But we can reverse engineer that thought process and use that market efficiency paradigm I've been teaching since the beginning
9 00:01:47,430 --> 00:02:00,090 of this mentorship, where we look at how liquidity can be either engineered or neutralized. And whether they're willing or unwilling participants, the market
10 00:02:00,090 --> 00:02:10,650 makers can draw traders into the marketplace, or take them out of the marketplace and by unseating them, they can assume their position, or put them
11 00:02:10,650 --> 00:02:19,170 in on the wrong side by engineering liquidity runs, and then take to market the opposite direction. In this case, what we're looking at here is that the US CAD
12 00:02:19,170 --> 00:02:32,400 is the one hour chart. And I had the chart trained in on November 10, and 11th. And we're looking at how the market made a slightly higher high here than here,
13 00:02:33,330 --> 00:02:41,250 while momentum was already posting a potential bearish divergence. Now when we talk about divergence, there's two types of divergence. There's type one
14 00:02:41,250 --> 00:02:50,220 divergence, which is your classic higher high but not seeing a higher high in the momentum. case that's type one bearish divergence, a bullish divergence
15 00:02:50,220 --> 00:02:57,750 would be the opposite where we see a lower low in price, but a failure to go lower in the stochastic or whatever momentum indicator you use. That would be a
16 00:02:57,750 --> 00:03:10,260 tight one bullish divergence. In trend trading, or momentum trading, there's called a Type Two trend following. And it's commonly referred to as hidden
17 00:03:10,260 --> 00:03:22,110 divergence. And it's been never really associated to who discovered it. But Nick van nice, he was the guy that released it to the trading community at large,
18 00:03:22,380 --> 00:03:33,480 George lane gets a lot of credit. And falsely I might add, he was not the creator of stochastic and he's not the the inventor, if you will, of divergence.
19 00:03:34,170 --> 00:03:42,300 But nonetheless, I it's one of those pet peeves of mine, I hate when I talk about this, I always got to bring it up, because it's just like a stick in my
20 00:03:42,300 --> 00:03:51,000 craw. I can't stand it. So I have to keep reminding the folks that are in trading. If they talk about divergence, they probably should be thanking a guy
21 00:03:51,090 --> 00:04:03,090 that they'll probably never even meet. But his name is Nick van nice. And it's a trend following divergence where if you have a higher, low, but the stochastic
22 00:04:03,090 --> 00:04:12,720 cycles down makes a lower low. That's trend falling in nature. And it usually gives us a really good momentum entry for bullish markets. Now I'm not teaching
23 00:04:12,720 --> 00:04:22,560 entries with stochastics or any momentum indicator here. But I'm going to teach you how to use a means of sentiment, or how retail minded traders are going to
24 00:04:22,560 --> 00:04:32,760 think about price. I like these ideas because when we read the books, when we get into trading, we get all these indicator based books and textbooks and
25 00:04:32,760 --> 00:04:41,880 courses and CDs and mentors and everybody else in their disciplines. Okay, and believe me, I went through all this myself. So it's not like I completely, you
26 00:04:41,880 --> 00:04:50,850 know, walk on water. I never had those issues before in the past. I came up through all that stuff, but the indicators teach us and they try to promote this
27 00:04:50,850 --> 00:04:58,740 idea that indicator based trading is the way to go. So therefore there shouldn't be no thought process involved at all about studying price. Just study if the
28 00:04:58,740 --> 00:05:05,940 indicators overbought If oversold if it's diverging bearish or bullish and that's it. So you have four conditions there. Are we overbought? Or are we
29 00:05:05,940 --> 00:05:17,010 oversold? And if we are overbought, is it diverging bearishly? Or if we're oversold, are we diverging bullish? And if it were that easy, then every way we
30 00:05:17,010 --> 00:05:24,870 make money and problem is there's some things you have to look at to determine if the market is in fact bullish. Or if it's bearish, and here's one for you.
31 00:05:26,010 --> 00:05:33,510 Is a fifth condition? Is there really a time to be trading? Because there's some time there isn't market sustained consolidation, and you don't want me doing
32 00:05:33,570 --> 00:05:46,230 much of anything? So if we're looking at an example here, okay, where price makes a higher high like this? Okay. Forgetting what's over here, like a retail
33 00:05:46,230 --> 00:05:55,290 trader like I did, I just looked okay, well, now we're making a higher high here. So naturally, I'm just looking at any time when the indicator was failing
34 00:05:55,320 --> 00:06:04,800 to make a higher high. That's how I started in the business folks in 1992. I'm looking at charts. And this is what I'm looking at a bearish divergence. Okay,
35 00:06:04,950 --> 00:06:14,370 so I would be looking to go short there in 1992, and 1993. But understanding what I know, now, there's liquidity above this high, they're not going to keep
36 00:06:14,370 --> 00:06:24,090 price this close. Okay, in that run that high. So there's biceps above there. So if I see bearish divergence in here, and it's qualified
37 00:06:31,980 --> 00:06:46,050 with this move, here, we have a crossover, it starts to drop down. Okay. But look what we have. We have a down candle here. We have equal lows in here. So
38 00:06:46,050 --> 00:07:00,090 the market drops down, clears out the equal lows dips into this bullish order block. This also in here, we have a range from the high down to the open on this
39 00:07:00,090 --> 00:07:11,910 candle. This range and price price trades down into it the midway point of it. Okay, just like a mean threshold. Okay, this portion, price comes down, delivers
40 00:07:11,910 --> 00:07:19,980 price below these lows in here. momentum indicator folks are gonna say okay, well, this is a solid bearish divergence. So we're going to be expecting lower
41 00:07:19,980 --> 00:07:31,020 prices. Price Action Based traders are saying this is actually a buy. And there's a equal high up in here and we have liquidity above this high here.
42 00:07:31,470 --> 00:07:45,480 We're too close to these levels up here not to run them. Market consolidates a little bit in here. And boom, it rallies up. Mix one more tap against this high
43 00:07:45,480 --> 00:07:57,930 here. Is price going to reject here? No, look what's happened. We have a low, which is directly related to this cycle through on stochastic. And then we have
44 00:07:57,930 --> 00:08:11,340 this higher low with a lower low on stochastic. This is that hidden divergence or trend following divergence. Okay. This actually is a very powerful scenario
45 00:08:11,340 --> 00:08:20,400 if you know what you're looking for in price. And you see this qualified in a momentum indicator. Not that you're basing your trade on the indicator, but I
46 00:08:20,400 --> 00:08:28,800 like seeing this because what this is doing is is is arm wrestling with the guys that are looking at this bearish divergence token and capture a high because
47 00:08:28,800 --> 00:08:38,010 think about what it is, when you're looking at indicators, the mythology is you can pick tops and bottoms with indicators. And while we can go back and look at
48 00:08:38,010 --> 00:08:48,450 the charts and see many examples how that may have been profitable. But there's many times where it isn't profitable either. So if we're going to be looking for
49 00:08:48,450 --> 00:08:56,730 price action to give us clues as to where price is going to be reaching for, you can't get that information by looking at an indicator because all that's doing
50 00:08:56,730 --> 00:09:06,660 is looking at the past. And it's compressing all that data mathematically and spitting out an output. That output has absolutely zero bearing on where the
51 00:09:06,660 --> 00:09:15,840 actual orders are in the marketplace, UBS Credit Suisse city, they're not in they're not in the business of looking at what stochastics is telling them.
52 00:09:15,900 --> 00:09:25,590 That's not what they're doing. But they are interested in where buy stops and sell stops are okay, and they're attacking that liquidity on the fund level. So
53 00:09:25,590 --> 00:09:33,750 when I talk about making a run on stops, it's not that they're aiming for retail stocks because you're not even in the same arena with them. But if they can push
54 00:09:33,750 --> 00:09:46,800 price to an area above an old high or below an old low, they know that there's going to be a pool of liquidity in the base of fund trading. So let's recall
55 00:09:46,980 --> 00:10:00,960 that market efficiency paradigm, retail views price, and they see what they want to see in the context of an indicator. Buy or Sell. overbought oversold market
56 00:10:00,960 --> 00:10:12,930 makers look at the participants thought processes about price. And they manipulate their decisions based on what they should be seeing in price. The
57 00:10:12,930 --> 00:10:25,740 indicators way of engineering a thought process behind a trader and almost like remote control in many instances, and funds, they trade with a trend following
58 00:10:25,740 --> 00:10:38,820 nature, their long term momentum trend followers, but those long term trend following systems that they use, can be targeted. And usually it's in
59 00:10:38,820 --> 00:10:47,640 consolidations, or sometimes if it's at a high, whatever, making a top in the marketplace, those funds that are aggressive, they try to sell short, they make
60 00:10:47,640 --> 00:10:54,960 one more pass up and knock out those individuals to smarter fund traders will go back in again. But you know what it's like sometimes when you get knocked out of
61 00:10:54,960 --> 00:11:04,920 a trade, the wind is taken out of your sails, you don't want to do it again, you're afraid. But when we look at divergence in here, okay, there's two camps.
62 00:11:05,580 --> 00:11:16,710 Those that see that higher high here. And the subsequent movement lower, which would confirm in any retail traders mind that they did catch or capture a top
63 00:11:16,740 --> 00:11:22,590 because that's what they're thinking. Okay, bearish divergence, they're looking for tops, bullish divergence, they're looking for bottoms,
64 00:11:22,859 --> 00:11:31,679 you ask any trader that sees that they're not looking at qualified entries and qualified exits and specific targets, what they're looking for is getting me in
65 00:11:31,709 --> 00:11:40,709 at the low and I'll figure out where I'm gonna get out later on. And believe me, I've done that same thing. When we look at price now we see that yes, they're
66 00:11:40,709 --> 00:11:48,659 going to see that as a bearish divergence, they're going to want to sell short. And we expect that same measure of retracement lower as well. But we want to see
67 00:11:48,659 --> 00:11:55,889 it come back down and hit this order block and wipe out this stops over here. Why would they want to come down below these lows in here to gather up all the
68 00:11:55,889 --> 00:12:02,759 cell stops? Why? Because they're willing sellers down here. Why would they want to go down here because they want to pick up those orders that liquidity is
69 00:12:02,759 --> 00:12:13,859 offering to they can buy them. So price quickly read prices. And now we will make a run above this high here. Why? Because this is the real divergence. Okay,
70 00:12:13,859 --> 00:12:23,939 or the new cycle low on the stochastic. Notice it's not oversold, it's not needed to be oversold. What we're doing is we're watching the momentum shift
71 00:12:23,969 --> 00:12:31,679 back down just to get the sell stops. Then they make a run for where the market really wants to be reaching for the orders. Not with this little indicator
72 00:12:31,679 --> 00:12:40,379 divergences indicating here. So we're seeing retail view this as a higher high in price with a lower high in Stochastics, which is what every textbook shows.
73 00:12:41,099 --> 00:12:51,299 That's a type one bearish divergence or a sell signal. Okay, you might have saw 30 pips or so in your favor, but you're not going to hold for just that you're
74 00:12:51,299 --> 00:12:57,299 gonna hold forever, you're gonna look to see it go lower and lower and lower, you know what it's like to be new, a new trader and looking at all this stuff.
75 00:12:57,299 --> 00:13:07,769 It's the same stuff you did, this was I did. But if we wait for the stochastics to cycle down below this low here, we can anticipate that same thing occurring
76 00:13:07,829 --> 00:13:18,329 when it runs out some sell stops, and it closes in the range. If we're bullish order block, then we can expect price to snap back higher, and take out this
77 00:13:18,329 --> 00:13:28,919 whole assumption that it's a bearish divergence in the marketplace. Again, price has no awareness of the divergence, but markets have an uncanny ability to be
78 00:13:28,919 --> 00:13:37,559 aware of the thought processes that are in all the traders because of their orders. Because of their trading because of their their leverage because of what
79 00:13:37,559 --> 00:13:46,049 they're doing in the marketplace the excitement around specific levels. So when we see this, we anticipate price moving higher, not on the basis of bullish
80 00:13:46,049 --> 00:13:55,919 divergence that you would see classically with a lower low and a higher low and the momentum indicator, what we're actually seeing is a higher low relative to
81 00:13:55,919 --> 00:14:07,019 this low and here this being high or low, but the momentum actually is cycled lower. Again, that's tied to hidden divergence, bullish trend following nature.
82 00:14:07,199 --> 00:14:17,039 And we can expect to see price drop above this high here. And price doesn't fact that you can see price give a nice opportunity here and those individuals look
83 00:14:17,039 --> 00:14:27,929 for this bearish divergence, we're left holding the bag Okay, folks, we're looking at the dollar Swiss as an hourly chart. Okay, we're looking at as
84 00:14:27,929 --> 00:14:39,599 another scenario where price has made a nice rally higher, and we're looking at what would potentially see as a type one bearish divergence. Now again, retail
85 00:14:39,599 --> 00:14:49,049 traders are gonna see that as well we're making a higher high in price. So if price is making a higher high here, we're not seeing that same thing reflected
86 00:14:49,049 --> 00:15:01,409 here. So it's the Kassius crossed down, and now we have a signal confirming lower prices. So what we do as price action based traders We anticipate seeing
87 00:15:01,409 --> 00:15:11,009 some measure of consolidation to retracement. And we watch this low back here on a stochastic. What's this relative to this low here, what we're not seeing in
88 00:15:11,009 --> 00:15:20,009 our expectation is the move below that low, we're not expecting that. But retail is expecting that they expect this to be a top in price trading all the way down
89 00:15:20,009 --> 00:15:28,799 to what would be seen as what classic support, they're looking over here, at this low and maybe even low back here. So in retail mindset, they're doing this,
90 00:15:28,859 --> 00:15:30,329 this is what's all over their charts.
91 00:15:32,130 --> 00:15:39,870 They're looking for a move down into this low. And they're looking for a move down to this low. Because that's what classic Support Resistance tells us when
92 00:15:39,870 --> 00:15:49,530 the textbooks, this is what classic divergence tells us, they're going to catch a top. So the markets making higher high in here, from this high to here went
93 00:15:49,530 --> 00:15:58,350 higher high. It's not happening here in the stochastics. So if it's not happening in Stochastics, it has to be indicating that you want to go lower. So
94 00:15:58,350 --> 00:16:03,840 they're looking for price to trade all the way down to this level here, that might be their first target. And then here's your second target. Because that's
95 00:16:03,840 --> 00:16:15,090 Support Resistance, what we see is, this is the last down candle prior to this up move. So inside this range in here and this wick, we expect price to trade
96 00:16:15,090 --> 00:16:24,480 down into that. Now the question is going to be Michael, do I use the high? Or do I use the body, you use the body? Why? Because of the condition that's here,
97 00:16:24,630 --> 00:16:39,090 we have a wick. It's been prices already traded several times through here. But we've only traded up from this point here. So this down close, we only had an up
98 00:16:39,090 --> 00:16:48,900 close and up close and up close. So we're going to be looking for price to trade down and deliver on the sell side of liquidity on this candles range. So what
99 00:16:48,900 --> 00:17:03,750 I'm saying is we're going to look at this candle here, encapsulate that whole little wick down into the open. Okay, and we're expecting price to Yes, cycle
100 00:17:03,750 --> 00:17:16,830 down and go lower, but not to go below the middle of that body that candle. So for move down into 9645 to 9640 is a low end is is expected that's reasonable.
101 00:17:16,980 --> 00:17:27,630 But we do not expect that low to be violated. That same reference point down here in the stochastic is here. We expect the stochastic to trade lower than
102 00:17:27,630 --> 00:17:40,380 this low in the indicator, but not show it in price. We expect price to trade higher. Why? Why would I expect that on the unfold? We have all this up here.
103 00:17:40,620 --> 00:17:50,460 All sellside liquidity offered, say we expecting prices to be delivered on a move higher to close in that range. So we're looking for a difference in
104 00:17:50,460 --> 00:17:59,160 direction. And we're just going to use this old low. So we're going to use Support Resistance ideas. But we're going to be diametrically opposed to what
105 00:17:59,160 --> 00:18:08,190 retail mindset is going to be. So we're looking up here after it drops down to here. So we're doing two things. We're bringing prognostication we're
106 00:18:08,190 --> 00:18:15,690 forecasting. And we still have targeting. So we know what we're looking for. For entry, we're expecting anticipating that market event to take place, we're going
107 00:18:15,690 --> 00:18:25,170 to go long around 9645 with an exit around 9708. Retails thinking this is a top it's selling off, it's going to break this low, it's going to make the low
108 00:18:25,710 --> 00:18:34,350 attempt to retest here and medium run down here. Based on just an indicator, what we're looking for is yes, this stochastic is going to drop down as price
109 00:18:34,350 --> 00:18:42,510 should drop down. But the stochastic is going to drop below this low indicator, but it won't go below this low here because the institutional order flow is
110 00:18:42,510 --> 00:18:48,210 supporting higher prices. And they're going to want to close this range in Okay, now watch what happens.
111 00:18:53,520 --> 00:19:16,620 Great there. This candle slow is 9645 to get the reaction there, boom. Totally different from what retail will be expecting. Higher low to this low, lower low
112 00:19:16,800 --> 00:19:27,240 and stochastic. Okay. This move here, not necessary. Don't worry about that one here. We're not talking about that. Now I'm focusing primarily on where the
113 00:19:27,270 --> 00:19:38,400 divergence gets traders in a pickle and messes him up. In this case, we were looking for liquidity on the upside. Okay, all I did was use a simple low back
114 00:19:38,400 --> 00:19:58,830 here. And if we use order blocks theory, that puts you up to here. And then you have equal highs up here as well. So 9760 And then you have 9728 and price blows
115 00:19:58,830 --> 00:20:12,180 through both of those Okay, so that's an example of a few divergence phantoms where folks like I did when I was a new trader, when you go in, you're looking
116 00:20:12,180 --> 00:20:28,620 for scenarios to anticipate specific things unfold. And the opposite happens. This move down here, dips into this order block right here, clearing the area
117 00:20:28,620 --> 00:20:45,870 sell stops, and then rally. Ultimately, another bearish divergence here with a higher high is that a bullish move? I'm sorry, is it a bearish move? Is it a
118 00:20:45,870 --> 00:20:55,590 bearish move expected in here? Well, if you looked at the retail mindset, you have bearish divergence. We're going to be expecting this low to not be violated
119 00:20:55,650 --> 00:21:04,980 but to low on the stochastics will be here you got one more time type to trend following lower low on the stochastics with a higher low and price continuation
120 00:21:04,980 --> 00:21:16,080 on the upside. Another bearish divergence, this is probably the top now it's got it's got to eventually happen. Here's your bearish divergence. Okay, what
121 00:21:16,080 --> 00:21:24,630 happens, price doesn't make a sell off, it just goes higher. And it ultimately punches one more time up, and then it gives off a sell. So please don't think
122 00:21:24,630 --> 00:21:33,660 that indicators are going to be the answer. If you're learning what I'm teaching, and you're getting still inspired to pull up indicators, only pull
123 00:21:33,660 --> 00:21:43,590 them up with this basis in mind only draw a contrasting view and it'll give you what the retail mindset thinking. And if you can do that and also see reasons
124 00:21:43,590 --> 00:21:51,360 behind the scenes. Why institutional order flow is going to suggest the opposite occurring. Chances are you've probably got a good deal. Until next time, I wish
125 00:21:51,360 --> 00:21:52,530 you good luck and good trading