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ICT Trading Concepts 101: Exploring the Basics

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  • Post last modified:May 27, 2024

If you’ve been in the forex trading community over the last few years, you’ve definitely heard of ICT trading concepts. It’s the new hot strategy every cool kid on the block is talking about. Trendy topics like this mostly get overrated quickly. Yet, that’s not the case for ICT concepts. In this article, I’m gonna walk you through the concept of ICT in trading and prove why I and many other traders are using it as their primary strategy.

I’ll warn you right now: this article will be full of controversial stuff. Yet, I’m only going to state the facts and what I believe in. You can challenge me but promise you’ll think things you read here. Otherwise, you’ll be better off closing this page right now. However (spoiler alert), you’ll gain much value if you hear me out. Now let’s explore what are ICT concepts in trading.

What Is ICT in Trading?

First off, let’s make it clear that ICT stands for the Inner Circle Trader, the nickname for Michael J. Huddlestone. He is the inventor of ICT concepts in trading. While some pessimists believe it’s only a repackaging of supply and demand and Wyckoff stuff, I don’t believe so.

To break down the ICT trading concepts, I’ll need weeks, even months. Michael himself has been teaching it for years on the ICT YouTube channel, and every day, there’s something new. So, I’ll keep things simple and explain the core ICT concepts. You can do a bit of research to find out more for yourself.

The ICT trading strategy is essentially the opposite of what traders have been told to do for decades. He himself calls the traditional methods “retail trading stuff.” He means that only retail traders believe in them, and that’s why over 90% of traders lose.

Now, don’t get me wrong, ICT concepts will not give you a 100% winrate with an average risk-reward ratio of 10. But they’ll definitely improve your trading and understanding of markets. In fact, that’s what studying ICT trading concepts did for me after 3 years of losing money on classical price action strategies.

So, let’s stop with the boring stuff and cut to the chase.

The Fundamentals of ICT Trading Concepts

Now, if you ask me, “What is ICT trading strategy in one word?” my answer would be liquidity. Liquidity is what the market moves toward. To be more technical, liquidity includes orders. From market orders to limit orders, wherever there is a possibility to trade an asset successfully, there is liquidity.

Now, let me ask you a question. Where does the most number of orders reside? Well, if you’ve been a trader for quite a while, you know that most individuals and even institutions place orders below or above support and resistance levels. And here’s a key difference between retail trading methods and ICT concepts: In the former, we count on these levels to hold the price, but in the latter, we expect the market to target them.

Areas on the chart that contain a significant volume of orders are called liquidity pools. With ICT trading strategies, these levels are mostly targets instead of entry levels.

ICT Trading Concepts: Liquidity Pools

Take a look at the chart above. Most traders see a price range between two strong support and resistance levels. The price had a fake breakout below the support and then successfully broke out of the range from above.

What ICT traders see is that the price has generated liquidity both on the buy-side and the sell-side above the range levels. Then, the market absorbed the liquidity below the support and ran to absorb the liquidity above the resistance level. As you see, liquidity is a target for price.

Basic Elements of ICT Trading Strategies

I’ve explained liquidity and its importance in ICT concepts. Now, let’s introduce other basic elements you’ll need for your own ICT trading strategy:

Fair Value Gap (FVG)

A fair value gap is a three-candle pattern (it’s not a classical price action pattern). An FVG forms on the middle candle’s body, where the wicks and bodies of the two nearby candles fail to fill. Take a look at the FVG schematics below:

ICT Strategy: Fair Value Gap (FVG)

When the middle candle, which is our FVG candle, is bullish, we have a bullish fair value gap. On the other hand, when it’s bearish, the Fair Value Gap is bearish. Typically, we expect bullish and bearish Fair Value Gaps to hold the price and push it in the main trend’s direction. So they can be used for entries. Meanwhile, the failure of FVGs can also be an early signal for trend reversal.

Order Blocks (OB)

Another crucial element in ICT concepts is the Order Block (OB). An Order Block is where a large volume has likely entered the market. Now, where would that be? Large volume moves the price, and therefore, an orderblock is the base of an impulsive move. To be more precise, it’s the last bullish (bearish) candle before a bearish (bullish) move begins. Check out the schematic below:

ICT Concepts: Order Blocks (OB)

Similar to Fair Value Gaps, we expect a bullish orderblock to act as a support level and a bearish orderblock to act as a resistance zone. Again, a break through these levels can point to a reversal.

Premium and Discount

Ever heard that an asset or product is expensive or cheap? That’s when their price is trading at a premium or a discount. There are various ways for determining whether the price is in premium or discount in ICT concepts. One of the most basic methods is by analyzing the price range.

ICT Trading Concepts: Premium and Discount

As the chart above demonstrates, to identify premiums and discounts based on price, you should first determine the most recent range’s high and low. Values above 50% of that range are premium, and values below it are discount. We typically buy at a discount and sell at a premium in ICT trading. However, keep in mind that the direction of the overall trend is very important.

Market Structure

So, how to identify the trend with ICT concepts? This method is really simple and has been around for decades. When the price is making higher highs and lows, it is demonstrating a bullish market structure. On the contrary, the market creates lower highs and lows during a bearish market structure.

ICT Trading Concepts: Market Structure

As ICT traders, we take advantage of bullish and bearish market structure (MSS) shifts to enter reversal trades. On the other hand, we also enter continuation trades when the trend continues, AKA break of structure (BoS). Both are shown in the chart above.

Session Killzones

As Michael says, a price chart consists of both price and time. While you might identify a good trading setup, you should not enter unless it is an optimal time. These periods are called Killzones. While many traders have different preferences and different interpretations of ICT’s teachings, here are the ICT Killzones I’ve been using for the last few years (New York time):

  • London Session Killzone: 2:00 – 5:00
  • New York Session Morning Killzone: 8:30 – 12:00
  • New York Session Afternoon Killzone: 13:00 – 16:00

ICT Killzones are when you can enter a trade. It does not mean that you should not hold your trades outside Killzones.

ICT Killzones

As you’ve noticed, I don’t trade the Asian session. In fact, ICT himself also warns about trading the Asian session, as the price can be very choppy. Moreover, I don’t normally trade the New York session’s afternoon Killzone because the price can again lose momentum, or the large move has already occurred, and its too late to enter.

Are ICT Concepts Superior to Other Strategies?

Now, let’s address the main point. Are ICT trading strategies profitable? And if so, are they better than other concepts? Well, this is where the debate gets intense. Many ICT traders consider other “retail strategies” as certain methods to lose money.

However, we’ve all seen someone who makes money with simple price action patterns and indicators. And, as an experienced day trader myself, I’ll tell you it’s not their strategy. It’s their emotional control, discipline, and risk management.

Meanwhile, I’ve seen a jump from a consistent loser to a consistently profitable trader in my own trading career. And what made it click for me was transitioning to ICT concepts. The reason is that (in my opinion as someone who studies finance and economics) what ICT says is much closer to the truth. The fact that markets target liquidity, and that’s how large players enter and exit the markets, is not further from the truth compared to drawing a triangle on the chart and expecting something to happen.

So, if you want a final verdict, in case you are NOT profitable with your own strategy, testing ICT trading strategies might be a game changer for you. On the other hand, if you are already making money, don’t fix what’s not broken.

Meanwhile, remember to backtest your ICT strategy and apply it to a demo account to see if it performs well before transitioning to real money trading. In fact, you should follow these steps for every trading strategy.

Conclusion

ICT concepts are the new cool thing in the trading space. Yet, other than being cool, they actually work for many traders. With ICT trading strategies being based on liquidity (arguably the most essential element in the markets), it’s only logical for it to have an advantage over many trading strategies, at least logically.

In this article, I’ve gone through the definition of ICT concepts and introduced some of the fundamental elements of every ICT trading strategy. So, you now have a basic understanding of what are ICT concepts in trading and how they work. I’ve also given my opinion that if you are not profitable, you can give ICT a go. The rest is upon you to determine whether it works for you or not.