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Episode 2 – Elements to a Trade Setup

Framework is the foundation of a trading model, so you have to have an understanding of what you are looking for.

This is a weekly NASDAQ E-Mini Futures March Delivery Contract. (NQH2022).

Think about each week before the new trading week begins, preferably on the weekend. The idea is you want to try
to get a read on what you think that weekly candle is going to do.
Is it going to go higher?
Is it going to go lower?
We’re not trying to predict the close of the weekly candle. You just want to see before this weekly candle opened, all
we had was the indecisive candle to the left. Do you think that the candle that would have opened and formed here
is more likely to go higher or lower? {Think you are at indecisive candle at (1) and you are trying to predict the price
action of candle at (2).}

We have been looking at lower prices. Why?

Seasonal tendencies: It tends to go down around this time anyway. (Nov-Dec)
Interest Rates: We also have discussions about how the Fed is going to raise the interest rates. Stock market does
not like that.
Earnings Season: There will be a lot of volatility because of earnings.

These factors plus the underlying tone of the market when we get to the daily timeframe analysis, show that the
market will be bearish for the upcoming week, and it would draw to lower prices/ liquidity at the bottom.
Was it expected that the entire range could be delivered in one week? NO. But this is not important. We are expecting
the weekly candle to expand on the lower end and gravitate towards the previous low at (3) which has not been
broken yet but that’s what we are going to aim for on Sunday’s Opening going into Monday’s Trading. That’s where
it is drawing to.
So, this will be the focus: What is the market likely to draw to? Price has an impulse to draw towards specific price
levels influenced by seasonality and other factors. It will cause prices to gravitate towards certain levels. The speed
and magnitude that price takes to get to these levels is gained through experience.
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The only thing we are looking for is a likely movement higher or lower based on the weekly candle.

On the DAILY CHART, we are looking for swing highs and swing lows to get our liquidity levels and the majority of our
trading and the draw on liquidity (DOL – what makes the market go higher or lower) is predominantly found in this
timeframe. So, the majority of our analysis should be linked to this timeframe. You must have an assumption whether
you’re expecting the weekly candle to expand higher or lower (weekly bias) but then we have to go to the daily chart
to figure out where we are in the grand scheme of things on that weekly range expanding higher or lower.
Because we are looking for lower prices and we’re looking for weakness, the expectation is we want to see every
short-term low {e.g. (1) and (2) in the chart}, where there are sell stops (SSL) i.e. liquidity being taken out. The market
generally draws to either of the two things: STOPS, which is liquidity or it’s running to an IMBALANCE.
Above Old Highs – Buy Stops
Below Old Lows – Sell Stops
Imbalances are something like in (3) where you have one single candle pass higher. It only went up one candle and
nothing moved down to overlap that same delivery on that price candle. It’s only going higher and there is nothing to
offset that and efficiently deliver price on the opposite end.
We are looking for lower prices. Now let’s drop to the hourly chart.

A FRAMEWORK FOR LOOKING AT THE WEEKLY RANGE AT ANHOURLY CHART:

Mark out the Monday Midnight New York Open and Friday’s Close and the beginning of Friday’s trading at midnight.
What happened prior to Friday? We had a nice sell-off on Thursday and the market went into consolidation overnight.
Notice what happens here on Friday: 14366.75 (Highlighted in Red) is the old low in the daily chart. This is where we
are thinking the price is likely to draw to because of that daily chart, there is lots of liquidity and large fund traders,
institutional traders, investors will be looking at these old lows and old highs and Liquidity Providers will be looking
to take business in around these same levels.
The entire week has been bearish. It’s been going lower since the beginning. Then we had consolidation {marked by
vertical lines} where the market creates a short-term high (2) and a short-term low (1). What rests above that short-
term high at (1)? BUY STOPS and What’s resting below this low at (2)? SELL STOPS. The market trades down initially
and takes down the sell stops. This is inducing shorts to engineer liquidity. Anybody who has a sell stop below (2) i.e.
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weakness, they are going to get tripped in the marketplace, so now they’re triggered in short and then they start doing
a run against those traders and against those that were already short from high at (1). The market’s being driven
higher, and the algorithm is going to attack the Buy Stop Liquidity Pool. Why would they do that? (A) It is going to
punish those individuals that went short at (2). When the price runs to that high at (1) it sends all those buy stops
into market orders flooding the marketplace that gives a huge influx of willing buyers at a high price which is the
perfect counter party to the Smart Money that wants to sell at a high price.
IMPORTANT: ANY TIME A SIGNIFICANT PRICE MOVE LOWER IS EXPECTED ALWAYS ANTICIPATE SOME MEASURE OF
A STOP HUNT ON BUY STOPS OR SHORT-TERM HIGH BEING TAKEN OUT. THE REVERSE IS ALSO TRUE: WHEN
LOOKING FOR HIGHER PRICES GENERALLY YOU WILL SEE A SHORT-TERM LOW TAKEN OUT AND SELL STOPS TAKEN
BEFORE YOU SEE A VERY PRONOUNCED RALLY HIGHER. THIS OCCURS ALMOST ON A DAILY BASIS.

Let’s drop down to a 15-Min timeframe:

14,366.75: Same Old Daily Low

Buyside Liquidity (Buy Stops): High on the Hourly Chart
Sellside Liquidity (Sell Stops): Low on the Hourly Chart
We can see how the market dropped down initially and takes the sell stops out (3). So, sell side liquidity has been
attacked and traders are now tripped into going short, if they sold on a break and then, the algorithm goes right back
up to an area where it’s been cleanly delivered i.e. relative equal highs. See how the high at (1) and (2) are almost
equal, so retail traders see this and define this as RESISTANCE. The market goes up when we are expecting lower
prices on that weekly chart. We are on the last day of the week. It’s already been weak and the only thing it’s been
doing is consolidate. The first thing price did was to break to the downside tripping traders is a breakout to go short.
So, now they have traders caught on the wrong side and now they want to take the market higher, where those buy
stops are going to be resting. The larger pool of liquidity is going to be resting above those old highs because it’s in
sync with the downtrend and everybody that went short the day before Friday, they saw this high form (1) & (2) and
once it broke below the low at (2), they all trailed there stop loss right above that area.
Once this pool of liquidity occurs, we want to drop down to lower time frames and start looking for something specific.
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Here is a 2-Min Chart. Why a 2-Min Chart? 1, 2, 3 Min chart (5 Minutes still has a lot of room for imbalances to occur
underneath that time frame) tend to be the best for finding imbalances. The reason why is because the High
Frequency Trading Algorithms are operating nothing really higher that 3 Min but majority of the time, they’re likely to
operate on seconds (15, 30, 45, 60 Seconds Interval) and what they are looking for are these small little imbalances.

We have the run on the buy stops. Look at the highs at (1), (2) and (3), it runs right through these highs. Once this
occurs on that higher timeframe (15M), you want to drop down to the lower time frames, 2M in this case. The market
creates a short-term low at (4) and then it breaks below that. This is key: This is called a break in market structure
(BMS). Now, the foundation and the underlying framework is we’re in a market that’s in a bearish trend i.e. we’re
expecting that weekly candle to expand lower. It’s been expanding all week, so we have momentum on our side. We
have a consolidation that’s occurred, and we had a pool of liquidity engineered with these relative equal highs at (1)
& (2) and the market broke down to the downside first and they ran on the highs. Once it broke the old high, we don’t
simply rush and go short there just because it went above old highs. We’re looking for some specific signatures that
tips the hand to us. Once the low at (4) is broken, we are going to look for imbalance to occur. The market is going to
retrace back into these imbalances (highlighted in orange), and we are going to sell right in those areas. (What ICT
Calls a Fair Value Gap – FVG). Focus on the imbalance right after the market structure breaks: The big candle breaks
down and the next candle opens trades higher and stops. So, from the low of the candle (A) to another green candle’s
high (B) {Check the marked area}, when the next candle opens and runs back into that imbalance, we can go right to
it and short. So, where is our stop going to be? Generally recommended to put above the high of Candle (A) but you
can choose whichever your individual risk parameters allow for.

WHAT WOULD YOU BE LOOKING FOR AS A DOWNSIDE OBJECTIVE? Let’s talk about the Liquidity Matrix.
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The area highlighted, both green and orange, is your range. It is nothing but the range between the high of the day
and low of the day so far. So, if we take that range and split it from the low to the high of the range to get to the
midpoint – can be determined by a simple 50% level on the Fibonacci. Anything above the 50% level is referred from
an algorithmic stance as a premium market (meaning – expensive) and anything in the lower 50% is a discount.
Markets can stay in a premium range for a while and not go to a discount. If we’re bearish, we want to look at the
previous range: Where are we inside that range? When the FVG is formed, our thought process should be that we’re
in a premium market so algorithms will want to go to a discount which is the opposing side of the marketplace i.e.
the algorithm is going to start pricing lower. You can have all the buyers in the world come in, but if the algo is in a
sell program, it is going lower, irrespective. Those buyers who come in with a huge influx of buy orders get crushed
and squeezed.

Think about what rests below the 50 level in the above chart. SELL STOPS. We are going to have to find willing buyers
to cover our sell position. We have willing buyers at a lower price relative to the price that we are short at. There are
willing buyers already at the 50% level or see the swing low with their sell stops. LOOK CLOSELY: What else resides
right near the low (Highlighted in Blue – see pointer)? There is an imbalance/ FVG. The price attacked the sell stops
resting below those swing lows and completely closed the imbalance (Buy Side Imbalance / Sell Side Inefficiency –
BISI). This imbalance has to have an equal delivery to be efficiently priced and booked by the algorithm. It goes down
and completely closes back in (see the second last green candle in the chart - right). This candle trades down, so it
fulfills its role of balancing the buyside offering and the sell side offering. THAT IS AN EFFICIENTLY DELIVERED PRICE
MOVE.

SUMMARY FOR THIS EPISODE:

LOOK FOR BREAKS IN MARKET STRUCTURE AFTER A POOL OF LIQUIDITY (BUY OR SELL STOPS), THAT HAVE BEEN
TAKEN IN AN OPPOSING DIRECTION OF YOUR WEEKLY EXPECTED RANGE. IN OTHER WORKDS, ARE YOU EXPECTING
HIGHER OR LOWER PRICES ON THE WEEKLY RANGE? IF YOU ARE LOOKING FOR LOWER PRICES, YOUR FOCUS IS ON
A RUN UP OF AN OLD HIGH. ONCE THAT FORMS, THEN YOU ARE LOOKING FOR A BREAK IN MARKET STRUCTURE ON
A LOWER TIMEFRAME. ONCE THAT OCCURS AND YOU GET AN IMBALANCE, THAT IS YOUR TRIGGER. THEN, SPLIT THE
RANGE THAT WAS CREATED AND FIND WHERE THE 50% IS. IF SHORT, FIND AN OLD LOW OR IMBALANCE TO AIM
FOR AS YOUR TARGET. TRY TO GET TO THE CLOSEST TARGET. DON’T GET FANCY AND GO FOR THE LOWEST HANGING
FRUIT.