Internal & External Liquidity Model - ICT Concepts

Introduction

This tutorial will guide you through the concepts of internal and external liquidity in trading, as demonstrated in the video on the Internal & External Liquidity Model. By understanding these concepts, you can build a robust trading strategy that leverages fair value gaps and market structure shifts.

Chapter 1: Understanding Fair Value Gaps

• Definition: Internal liquidity is represented by a fair value gap, which is identified through a three-candle pattern:
  • Candle 1: A bullish or bearish candle.
  • Candle 2: A small candle.
  • Candle 3: A candle that closes without overlapping the wick of Candle 1.
• Importance: Fair value gaps indicate aggressive price movement, suggesting potential reversal or continuation points.

Chapter 2: Exploring External Liquidity

• Definition: External liquidity refers to the highs and lows in the market:
  • Swing High: A high with lower highs on either side.
  • Swing Low: A low with higher lows on either side.
• Application: Identifying these points helps traders understand potential support and resistance levels.

Chapter 3: The Relationship Between Internal and External Liquidity

• Concept: Price movements often oscillate between external and internal liquidity points.
  • When price sweeps through external liquidity without significant displacement, it is likely to return to internal liquidity.
  • This oscillation can be visualized as price moving from external to internal, and back to external, creating a trading opportunity.

Chapter 4: Building the Trading Model

1. Time Frame Selection: Start on a higher time frame to identify key levels of internal and external liquidity.
2. Drop Down to Lower Time Frame:
   • Look for a Kill Zone (specific time frame known for higher trading volume).
   • Identify a market structure shift.
   • Locate a fair value gap.
3. Set Your Target: Aim for a risk-to-reward ratio of 2:1.

Chapter 5: Analyzing Examples

Example 1

• Setup: Analyze the NQ daily chart:
  • Identify an external low sweep and a fair value gap.
  • Drop down to the hourly chart to find a fair value gap.
• Execution:
  • Enter a trade at the fair value gap.
  • Set a stop loss below the fair value gap and target a 2:1 reward.

Example 2

• Setup: Start with the daily fair value gap:
  • Confirm a sweep of an hourly high.
  • Identify internal liquidity below the fair value gap.
• Execution:
  • Look for price displacement and a fair value gap on the 5-minute chart.
  • Set your stop loss appropriately and target a 2:1 reward.

Example 3

• Setup: Analyze the last few days of price action:
  • Identify previous day highs and lows.
  • Focus on the mean threshold of an up-close candle.
• Execution:
  • Wait for a structure shift and fair value gap for entry.
  • Set your stop loss and target 2:1.

Example 4

• Higher Time Frame Trading:
  • Identify previous month's low as key liquidity.
  • Drop to the daily chart to find a market structure shift and fair value gap.
• Execution:
  • Enter at the fair value gap with a targeted 2:1 ratio.

Example 5

• Setup: Review the weekly chart for internal liquidity:
  • Anticipate movement from internal to external liquidity.
• Execution:
  • Drop down to the 15-minute chart for a fair value gap entry.
  • Set your stop loss and target 2:1.

Conclusion

By understanding the internal and external liquidity model, you can develop a disciplined trading strategy that incorporates fair value gaps and market structure analysis. Practicing these concepts will enhance your ability to identify profitable trading opportunities across various time frames. Make sure to review key concepts frequently and apply them in live trading for the best results.