ICT Trading Strategy (How does it work?)

12/04/2024

The ICT trading strategy, developed by the enigmatic online figure known as Inner Circle Trader (ICT), has become a popular approach within the retail forex and futures trading space.

It goes beyond just technical analysis, incorporating elements of market structure, order flow, and even a dash of philosophical trading psychology.

This article delves into the core concepts of ICT trading, exploring its strengths and weaknesses to equip you with a well-rounded understanding of this unique methodology.

What is the ICT Trading Strategy? 

Inner Circle Trading (ICT) is a comprehensive approach to trading developed by professional trader Michael Huddleston. ICT emphasizes the importance of understanding market structure, price action, and intermarket relationships to gain a strategic edge in trading.

At its core, the ICT trading strategy is grounded in the belief that understanding market structure and price dynamics is paramount to achieving success in trading.

Unlike traditional technical analysis methods that rely heavily on indicators and oscillators, the ICT strategy emphasizes a more holistic approach, integrating various disciplines such as technical analysis, fundamental analysis, and risk management into its framework.

So, who is Michael Huddleston? 

Here’s what we do know:

• He is the creator of the ICT trading strategy, a popular approach in forex and futures trading.
• He has a significant online presence, with a YouTube channel, “Inner Circle Trader”, boasting over a million subscribers.
• His educational content focuses on market structure, price action analysis, and understanding the behaviour of large market participants.

Today, he has over 20 years experience in trading the markets, with an impact on the trading community - particularly in regards to those interested in a structured, market-centric approach - that remains  undeniable.

His trading methodology (ICT) revolves around several key tenets:

• Market Levels: ICT trading places significant emphasis on identifying key price levels, including Fair Value Gaps (FVGs), Order Blocks (OBs), and Liquidity Injections (LIs). These areas are believed to represent zones of potential future support and resistance, where price might stall or reverse.
• Intermarket Analysis: Intermarket analysis examines the relationships between different financial markets, such as stocks, bonds, currencies, and commodities. By understanding how these markets interact and influence each other, traders can gain valuable insights into broader market trends and correlations that can inform their trading decisions.
• Price Action: The ICT trading strategy heavily utilizes price action analysis, focusing on candlestick patterns, wicks, and engulfing bars to gauge market sentiment and identify potential trading opportunities.
• Market Maker Behavior: ICT posits that understanding the actions of large market participants, known as Market Makers (MMs), is crucial for success. He advocates for studying how MMs supposedly inject liquidity and manipulate price action to their advantage.
• Fibonacci Retracements: While not the sole focus, ICT incorporates Fibonacci retracements to identify potential support and resistance zones that might coincide with other identified levels.

PS: To get a head-start on Fibonacci retracements, pivot points, and volume profiles, as well as insurmountable trading knowledge that you’ll carry with you for life, check out the Best-Selling trading book “Trading with DiNapoli Levels,” written by Joe Dinapoli himself.

• Smart Money Concepts: ICT draws on the concept of “Smart Money,” referring to institutional traders with superior resources and information. He encourages traders to identify areas where “Smart Money” might accumulate or distribute, potentially foreshadowing future price movements.

The ICT Trading Strategy

ICT advocates for a multi-layered approach that combines these concepts. Here’s a simplified breakdown of the potential process:

1. Market Prep: Identify key levels (FVGs, OBs, LIs) on the chosen instrument using daily and intraday charts.
2. Price Action Analysis: Monitor price action throughout the trading session, looking for signals like breakouts or reversals near these identified levels.
3. Market Maker Hypothesis: Consider where MMs might be injecting liquidity or accumulating/distributing, potentially influencing price behavior.
4. Trade Confirmation: Look for confluence between identified levels, price action signals, and potential Smart Money activity before entering a trade.

The Allure of ICT Trading: Potential Benefits

• Structured Framework: The ICT trading strategy offers a clear, step-by-step approach to analyzing the market, potentially aiding new traders in developing discipline and avoiding impulsive decisions.
• Focus on Market Behavior: By emphasizing price action and market structure, ICT encourages understanding underlying market dynamics rather than simply chasing indicators.
• Active Community: A large online community has formed around ICT’s teachings, fostering knowledge sharing and providing a platform for aspiring traders to connect and learn.

Critical Considerations: Potential Drawbacks of the ICT Trading Strategy

• Subjectivity: Interpreting key levels and identifying “Smart Money” behaviour can be subjective, potentially leading to missed signals or misreadings of the market.
• Complexity: While structured, ICT trading strategy incorporates various elements, which can be overwhelming for beginners who might struggle to grasp all the nuances initially.
• Limited Backtesting: The effectiveness of some ICT concepts, particularly those related to Market Maker behaviour, can be challenging to empirically test using traditional backtesting methods.

The Final Verdict: Is the ICT Trading Strategy Your Path to Success?

ICT trading offers a well-defined approach to market analysis that can benefit aspiring traders seeking to move beyond basic technical indicators.

However, it's crucial to maintain realistic expectations. Success in the trading arena hinges on discipline, robust risk management, and a healthy dose of reality.

The ICT trading strategy should be viewed as a toolbox that, when combined with experience and sound trading practices, can potentially equip you to navigate the complexities of the financial markets.