Speaking of the ICT trading model, I recently compiled a Chinese tutorial using Fable 5 (burned through most of my weekly quota) and posted it on my website 🤭. Fable 5 is the first author, and I’m the corresponding author. Welcome to human or AI distillation 🤪. https://t.co/3nh9ZudLOI https://t.co/vpqbJZu0Ey

ICT / SMC Trading System Tutorial

Source: https://chanlunpp.org/basics-ict Technical Analysis Fundamentals · ICT / SMC

Seven Chapters · 53 Structural Diagrams · Complete Chinese-English Glossary — Arranged in order of conceptual dependency, with each term explained before use.

This tutorial systematically teaches all core concepts of the ICT (Inner Circle Trader) system, also commonly known as SMC (Smart Money Concepts). Arrangement: Following conceptual dependency order. It first explains “why the market moves” (liquidity), then “what price looks like” (market structure), then “what debts the algorithm owes” (imbalance and rebalancing), then “where institutions enter and exit” (discount and premium), then “when institutions act” (time), and finally assembles all components into a complete trading model. Every term is guaranteed to be explained first, then used; for terms that must appear earlier, a “term card” provides a one-sentence version and notes where the detailed explanation is located. ICT concepts originated in the forex and equity index futures markets, but their logic applies to any continuous auction market with sufficient participants (forex, equity index futures, commodities, cryptocurrencies, liquid individual stocks). This tutorial uses a “universal market” as its narrative base: all experience-based values involving specific points are converted into ADR (Average Daily Range) ratios or structural references, with specific equity index futures points provided in parentheses for futures traders for comparison.

Notation: Three Writing Conventions

1. Chinese first, English follows. Each concept is formally named in Chinese, with its full English name and abbreviation in parentheses on first appearance, e.g., 「位移(Displacement)」, 「公平价值缺口(Fair Value Gap, FVG)」. Subsequent text uses the Chinese translation or widely accepted English abbreviations (FVG, OB, BSL, etc.), without appearing as long English words without Chinese equivalents. Appendix A is a complete Chinese-English reference table for looking up any English term.
2. Only use internationally accepted abbreviations. Abbreviations common in chart software and market discussions (FVG / OB / BSL / SSL / MSS / OTE / PD Array …) are kept as-is, because that’s what you see in real market environments; but each abbreviation in this tutorial has a fixed Chinese name, and the two can be used interchangeably.
3. Bullish and bearish patterns appear in pairs. To save space, most concepts only explain one direction, with the other direction being a complete mirror image; wherever “mirror image” is written, simply swap “high/low”, “buy/sell”, and “rise/fall” word-for-word.

Chapter 0 Introduction: Three Keys to Understanding the ICT System

Before entering any specific concept, establish three worldviews that run throughout. Every term, pattern, and rule in the ICT system is an expansion of these three sentences.

0.1 Key One: There Are Only Two Types of People in the Market, and Large Funds Must “Manufacture” the Opposite Side

ICT crudely divides all market participants into two groups:

• Smart Money (Institutional Funds): Central banks, market makers, investment banks, quantitative institutions, and the “algorithms” mentioned by ICT that execute price delivery. Their orders are huge and are the real drivers of market moves.
• Retail Traders and Small Funds (Speculative Non-Informed Funds): The group that trades based on indicators, candlestick patterns, breakout signals, and sentiment. Their common characteristic is: placing stop-loss orders in locations visible to everyone.

The key lies in the situation of the first type: Orders are so large that “naturally existing” counterparties in the market are completely insufficient for them to execute. To buy 10,000 lots, someone must simultaneously sell 10,000 lots to you; at any given moment, the sell orders on the order book are far from sufficient. So Smart Money has only one path—proactively manufacture counterparties: first push the price towards areas where retail stop-losses and pending orders are dense, triggering those orders to execute, then use this “squeezed out” volume to complete their own position building or unwinding.

This is why “most retail traders lose money in the long run” is not a coincidence, but a structure: retail stop-losses are exactly the fuel Smart Money needs. What you should do is not complain, but figure out where the fuel is piled and when it will be ignited, then stand on the side lighting the match.

0.2 Key Two: Price Only Does Two Things

Figure 0-1 Price only does two things Figure 0-1 Price only does two things— 1 Displacement upward leaves imbalance → 2 breaks old high sweeps buy-side liquidity (takes liquidity) → 3 rebalances fair value gap (pays the debt) → 4 heads to the next liquidity pool; two things always take turns. The entire system can be compressed into one iron rule:

Price at any moment only does two things: either it seeks liquidity, or it rebalances imbalance.

• Seek Liquidity: Price moves towards highs/lows where stop-losses and pending orders are piled up, triggering those orders—this is Smart Money collecting counterparties (Chapter 1).
• Rebalance Imbalance: Price returns to revisit an area that was previously “rushed through one-way without sufficient two-way trading,” settling the outstanding debt—this is the algorithm pursuing delivery efficiency (Chapter 3).

Any market move can be categorized into one of these two things. Judging the direction of the next move ultimately comes down to asking: “Which liquidity pool hasn’t been taken yet? Which imbalance hasn’t been rebalanced?”

0.3 Key Three: Time × Price, Indispensable Together

Price levels are useless without considering time; time is useless without price being at a key location. Only when the two overlap do they produce precision.

• Looking only at price levels without time, you will be repeatedly tormented by false breakouts at any time of day;
• Looking only at time without price levels, you have no point of entry;
• Price reaching a key location + being in the exact time window when algorithms are active—this is the high-certainty entry condition.

What constitutes a “key location” and an “active time window” are the topics of Chapters 4 and 5, respectively.

0.4 High-Frequency Term Quick View

The following six terms appear most frequently throughout. Here, a one-sentence version of each is given first so you won’t get stuck before reading their formal definitions; the full elaboration of each term is in the indicated chapters.

0.5 Full-Text Map and Conventions

Dependence relationship of the seven chapters:

1. Chapter 1 Liquidity — The motivation for everything: why price moves and in which direction.
2. Chapter 2 Market Structure — The skeleton left by price movement: swing points, trends, structural shifts.
3. Chapter 3 Imbalance & Rebalancing — The algorithm’s “to-do list”: fair value gaps and various gaps.
4. Chapter 4 Discount & Premium — Institutional wholesale/retail logic: where to buy and where to sell (the full family of price delivery arrays).
5. Chapter 5 Time — The algorithm’s schedule: trading sessions, opening price, intraday and weekly rhythms.
6. Chapter 6 Cross-Market Verification — Smart Money Divergence (SMT): using correlated markets to “verify” a reversal.
7. Chapter 7 From Concept to Trading — Assembling the first six chapters into complete models (2022 model, market maker model, etc.) and operational discipline.

Three conventions throughout:

• Time always uses New York Time (EST/EDT). All of ICT’s time theories are anchored to New York Time because its “algorithms” treat New York midnight as the start of the day. Your local time zone only needs one conversion.
• “Higher Time Frame / Lower Time Frame” (HTF / LTF): Higher time frame refers to relatively larger candlestick periods (monthly/weekly/daily/4-hour), lower time frame refers to smaller periods (15-minute/5-minute/1-minute). The standard posture of this system is always: HTF determines direction, LTF determines entry.
• Bullish/bearish patterns always appear in pairs. To save space, most concepts focus on explaining one direction, with the other direction being a simple mirror image.

Chapter 1 Liquidity — Why the Market Moves

Chapter Navigation: This chapter answers the most fundamental question in the ICT system—what is the fuel for price movement. Sequence: First understand how stop-loss orders become “someone else’s volume” (1.1-1.2), then learn to mark on the chart where the fuel is piled (1.3-1.4), then understand the standard action of Smart Money igniting the fuel—stop hunts (1.5), and finally learn to judge price’s destination by “where is the next fuel depot, are there obstacles along the way” (1.6-1.7).

1.1 What is Liquidity and Why It Is Paramount

The textbook definition of liquidity is “the degree to which an asset can be traded quickly and at low cost”: in a liquid market, buyers and sellers are always available, spreads are narrow, and slippage is minimal; in an illiquid market, trading is difficult, and prices can jump significantly.

But within the ICT system, this term has a sharper meaning:

Liquidity = all “pending to be triggered” orders in the market, especially stop-loss orders.

For retail traders, their own orders are small and can be executed anytime, so “liquidity” seems irrelevant. But for Smart Money, liquidity is a matter of life and death—without sufficient counterparties, large positions can neither be built nor exited. An institution wanting to buy 10,000 lots, if it simply smashes market orders at the order book, will push the price itself skyward, resulting in a terrible average fill price. What it needs is: at a certain price level, a sudden surge of orders from sellers willing (or forced) to sell to it.

Where can a “sudden surge” of large orders occur? The answer is where retail stop-losses are dense. Thus, the first worldview of the ICT system is established:

• Liquidity is not about “whether I can get filled,” but about “where institutions want counterparties piled up.”
• Understanding where liquidity is piled means understanding where price will go next—because price is being pushed by institutions towards liquidity.

1.2 How Stop-Loss Orders Become Liquidity

Figure 1-1 Stop-loss orders become institutional counterparties Figure 1-1 Stop-loss orders become institutional counterparties— Long stop-losses are placed below the old low; price pierces the old low, stop-loss triggers as a sell market order, which is absorbed by institutional buy orders, followed by a V-shaped reversal upward. Short stops mirror above. This is the most important mechanism in the entire tutorial, worth explaining slowly and clearly.

Stop-Loss Orders (SL) are a tool for retail traders to protect themselves: those going long place an order below their entry price saying “help me sell if it drops to here”; those going short place an order above their entry price saying “help me buy back if it rises to here.” Stop-loss orders lie dormant until the price reaches them, at which point they become market orders for immediate execution.

Now, switching to the institutional perspective, let’s look at these two types of stop-loss orders again:

• Long stop-losses (placed below lows), when triggered, execute sells—for institutions wanting to buy, this is counterparties handing themselves over to sell to them.
• Short stop-losses (placed above highs), when triggered, execute buys—for institutions wanting to sell, this is counterparties handing themselves over to buy from them.

Adding two other types of orders yields the exact same effect:

• Breakout Stop Orders: Many retail traders have learned “buy on breakout above old highs, sell on breakout below old lows.” Their buy stop orders are placed above old highs, and sell stop orders below old lows—when triggered, they also become buy/sell market orders.
• Passive Limit Orders: Some institutions and trading systems place reverse limit orders at key levels waiting to be filled.

Summing up these orders, you’ll find a striking pattern: above old highs is piled almost entirely “buy orders,” and below old lows is piled almost entirely “sell orders”—and their locations are predictable, because the education retail traders receive is uniform (stop-losses placed just outside “key levels”).

Institutional motivation becomes completely clear:

• Institutions want to build large short positions → need massive buy-side counterparties → push price above old highs, triggering short stops and breakout buy orders → use this buying pressure to sell all their short positions.
• Institutions want to build large long positions → need massive sell-side counterparties → smash price through old lows, triggering long stops and breakout sell orders → use this selling pressure to buy back all their long positions.

This is why this system says price is delivered to liquidity—it’s not that the market just happens to reach that point, but that there is something institutions need there.

📌Term Card | Sweep / Raid / Run: The action of price piercing into an order-dense area, triggering the orders within, and then reversing. In Chinese, “扫流动性” (sweeping liquidity), “扫止损” (sweeping stop-losses), “猎杀” (hunting) all refer to this. This tutorial uniformly uses “sweep” or “sweeping.”

1.3 Buy-Side Liquidity and Sell-Side Liquidity: Naming the Fuel Depots on Both Sides

Figure 1-2 Buy-Side Liquidity / Sell-Side Liquidity (BSL / SSL) pools Figure 1-2 Buy-Side Liquidity / Sell-Side Liquidity (BSL / SSL) pools— Above old highs pile short stops and breakout buy orders (BSL); below old lows pile long stops and breakout sell orders (SSL); institutions use sweeping these pools to obtain counterparties. ICT gives specific names to the liquidity on the upper and lower sides:

Buy-Side Liquidity (BSL) — The collection of “buy orders” piled above highs:

• Short sellers’ stop-losses (to buy back and close positions);
• Breakout chasers’ buy stop orders;
• Trend-following systems’ buy stop orders.

Sell-Side Liquidity (SSL) — The collection of “sell orders” piled below lows:

• Long traders’ stop-losses (to sell and close positions);
• Breakout chasers’ sell stop orders;
• Trend-following systems’ sell stop orders.

The naming logic: Named by the direction of the order, not by “who gets hurt.” What is triggered above old highs is buy orders, so it’s called buy-side liquidity; what is triggered below old lows is sell orders, so it’s called sell-side liquidity.

Basic usage (here giving principles first, complete entry models are in Chapter 7):

• After a significant rally, the high point has a prepared BSL pool above → for institutions, this is an ideal place to sell/short;
• After a significant drop, the low point has a prepared SSL pool below → for institutions, this is an ideal place to buy/long;
• Therefore, the operational direction of this system sounds completely counterintuitive: look for shorting opportunities above old highs, look for longing opportunities below old lows. The psychological discomfort comes from not having internalized the mechanism that “stop-loss = counterparty.”

1.4 Liquidity Pool Map: Where the Fuel Is Piled

Figure 1-3 Equal Highs / Equal Lows (EQH / EQL) Figure 1-3 Equal Highs / Equal Lows (EQH / EQL)— Price levels touched multiple times without breaking see a large buildup of pending orders on the outside, forming the fattest liquidity pools; retail reads them as “double tops/bottoms,” institutions read them as “fuel full.” Open the chart, and liquidity systematically piles up at the following locations. Graded into three levels by “pool size,” with several special patterns:

By Level:

1. Major Liquidity: Weekly, monthly, quarterly, annual-level highs and lows. Pools are huge, institutions take days to weeks to digest. Use monthly/weekly charts for major direction, daily charts to locate the largest pools.
2. Medium Liquidity: Highs and lows on 15-minute to 1-hour charts. The main battlefield for intraday trading.
3. Minor Liquidity: Highs and lows on 1-5 minute charts. Usually swept as a “final stroke” after medium/major pools are swept.

By Pattern:

1. Equal Highs / Equal Lows (EQH / EQL): Two or more almost equal highs (or equal lows). Retail reads them as “double top resistance / double bottom support,” so they concentrate stop-losses outside—EQH/EQL are therefore the fattest liquidity pools, institutions almost inevitably come to harvest. Seeing EQH/EQL, the first reaction shouldn’t be “there’s support/resistance here,” but “this will be swept sooner or later.”
2. Swing Highs / Lows (Swing Points): Stop-losses pile up outside any local extreme point (the strict definition of swing points is in Chapter 2).
3. Range High / Low: During sideways movement, orders pile up on both sides outside the range—breakout bulls and breakout bears both have pending orders.
4. Trendline Liquidity: Retail traders buy along trendlines, placing stop-losses outside the trendline—thus a “beautiful trendline” has a whole row of stop-losses lying outside. Institutions will deliberately let price pierce the trendline, eat this row of stop-losses, then continue in the original direction. The more beautiful the trendline and the more it’s touched, the thicker the stop-losses outside.

Figure 1-4 Trendline Liquidity Figure 1-4 Trendline Liquidity— Buyers along the trendline have all their stop-losses placed below the line, forming a stop-loss band parallel to the trendline; after price pierces and sweeps, it resumes the original direction.

1. Previous Day/Week/Month High & Low (PDH/PDL, PWH/PWL): Previous day/week/month highs and lows are reference points visible to the entire market, naturally gathering stop-losses; they are the most commonly used targets in intraday trading (Chapters 5 and 7 elaborate).
2. Round Numbers: Psychological price levels like 100.00, 1.2000.
3. Session Highs/Lows: Highs and lows formed by the Asian, London, and New York sessions respectively (session divisions and usage are in Chapter 5).

A general rule: The more times a level is touched without breaking, the thicker the orders piled outside, and the more violent the move when it’s swept. Retail traders see “three touches without breaking” and read it as “strong support”; institutions read it as “fuel full.”

1.5 Stop Hunts and Bull/Bear Traps

Stop Hunt: Large participants deliberately pushing price towards stop-loss-dense areas and triggering those orders. This is the active application of the mechanism in section 1.2 and is the core drama the market repeats daily in this system’s view.

A standard stop hunt looks like this:

1. Price advances towards a conspicuous old high/low (usually fast and sharp, creating the perception of “about to break out”);
2. Pierces the level, triggering retail stop-losses and breakout orders in batches;
3. Institutions use this counterparty flow to build their own positions;
4. Price quickly reverses—because the purpose of pushing price has been achieved, staying there is meaningless;
5. A long wick remains on the chart, along with a batch of retail traders trapped at the extreme.

Institutional motivation breakdown: Steps 2-3 are the core of the entire process. The volume that surges at the moment of piercing is largely absorbed in the opposite direction by institutions (retail buy orders are sold to by institutions, retail sell orders are bought from by institutions). So the essence of the long wick is: near the wick tip, a large-scale “chip transfer” occurred—from retail hands into institutional hands.

This gives rise to two classic traps:

• Bull Trap: At a location where the higher time frame structure is clearly bearish, price breaks above an old high, luring retail into chasing longs, then reverses down. The long chasers are trapped, and their stop-losses (below) become fuel for the next leg down.
• Bear Trap: Mirror image—structure is bullish, breaks below old low, lures shorts, then reverses up.

Thus, this system has one iron rule:

Do not buy when old highs are broken, nor sell when old lows are broken.

It may seem like “missing the breakout move,” but what you’re avoiding is the institution’s favorite harvesting scenario. How to distinguish a real break (one institutions follow through on) from a false one requires the concept of “displacement” from Chapter 2—let’s set that aside for now.

Review habit: Daily charts are used to locate liquidity pools and imbalance zones; 1-hour charts are used to observe how price moves towards them step by step. After market close each day, ask yourself: which pools were swept today? What did price do after sweeping them?

1.6 Draw on Liquidity (DOL): Which Pool is Currently Attracting Price

Draw on Liquidity (DOL): The liquidity pool or imbalance zone currently “attracting” price. This is the core question in intraday analysis—the answer to “where is price going next?”

Potential candidates for DOL intraday include:

• Previous day high/low (PDH/PDL), previous week high/low (PWH/PWL);
• Highs and lows of the Asian/London/New York sessions;
• Equal highs / equal lows (EQH/EQL);
• Imbalance zones not yet rebalanced (Chapter 3).

Chain of thought for judging DOL:

1. Return to Key Two: Price only does two things—sweep liquidity, rebalance imbalance. First ask: which one was just completed?
2. Mark candidates on both sides: Where is the nearest pool/imbalance above, where is the one below?
3. Combine with higher time frame direction (institutional order flow, Chapter 7): Which side’s counterparties does the algorithm currently need more?
4. Once DOL is determined, stick to this hypothesis until price actually reaches it—don’t change your mind back and forth because of one or two counter-trend candles along the way (this oscillation this system calls direction flip-flop, a standard way retail loses money).

The strongest form of DOL is the “EQH/EQL + low resistance” combination (see Figures 1-3, 1-5)—which is exactly the topic of the next section.

1.7 High Resistance vs. Low Resistance: Are There Obstacles on the Way to the Target

Figure 1-5 High Resistance vs. Low Resistance Liquidity Run (HRLR vs. LRLR) Figure 1-5 High Resistance vs. Low Resistance Liquidity Run (HRLR vs. LRLR)— The path to the target is dense with counter reference points = high resistance (time-consuming and laborious); clear path, stop-losses untouched = low resistance (preferred target, “low-hanging fruit”). The same liquidity pool, whether it’s “easy to eat” depends on how many counter obstacles are on the path to it. ICT uses a pair of concepts to describe:

Low Resistance Liquidity Run (LRLR): The path to the pool has almost no counter reference points blocking, price can reach it “like a knife through butter.” Characteristics:

• A string of unswept stop-losses (e.g., a series of lower highs, each with stop-losses above, but never revisited from below);
• Or simply a “virgin” area that has never been induced.

High Resistance Liquidity Run (HRLR): The path is full of areas that have been repeatedly traded, counter institutional reference points; price has to “gnaw” through, time-consuming and laborious, often moving haltingly.

📌Term Card | Price Delivery Array (PD Array): The collective term for various reference points left by institutions on charts (order blocks, gaps, old highs/lows, etc.), where price tends to react. Chapter 4 provides the complete family. Here, just understand: “counter PD Array on the path” = obstacles on the way.

Identification mantra:

• A low that swept a previous low and was rejected is a “high resistance low”—its same-side liquidity has been consumed;
• A high that didn’t reach the previous high before turning is a “low resistance high”—its stop-losses above are untouched, making it an ideal target;
• We want high resistance patterns on the side of our position (chewed bones behind), and low resistance patterns on the side of the target (untouched fat ahead).

Why low resistance is the preferred target:

• No counter obstacles → higher probability of reaching, faster, shorter holding time;
• Institutions also prefer it—the algorithm prioritizes delivering price to the easiest-to-reach liquidity;
• This system repeatedly emphasizes: always aim for “low-hanging fruit”—a short but clear path is better than a long, obstacle-filled one. Consistently picking small fruits compounds far better than occasionally gambling on a big move.

Inference for holding time: If the target is a low resistance path → quick in, quick out; if the target is a high resistance path → must allow more time for the move, avoid tight trailing stops.

1.8 Chapter 1 Key Points

• Liquidity = orders pending to be triggered (especially stop-losses); their locations are predictable.
• Triggered stop-losses become opposite market orders: long stop = sell order, short stop = buy order—this is the source of institutional counterparties.
• Above old highs is Buy-Side Liquidity (BSL), below old lows is Sell-Side Liquidity (SSL); institutions sell in BSL, buy in SSL.
• Equal highs/lows (EQH/EQL), beautiful trendlines, levels touched multiple times without breaking = fattest liquidity pools = swept sooner or later.
• Do not chase longs when old highs break, do not chase shorts when old lows break.
• Ask daily: what was swept? what hasn’t been swept yet? What is the next Draw on Liquidity (DOL)? Is the path low resistance or high resistance?

Chapter 2 Market Structure — The Skeleton of Price

Chapter Navigation: Chapter 1 explained the motivation for price movement (liquidity). This chapter builds a descriptive language for price movement itself: the smallest unit is the swing point (2.1), swing points connect to form trends (2.2), swing points come in three levels (2.3); then introduces this system’s core concept for judging “true/false moves”—displacement (2.4); with displacement, the trend reversal signal MSS can be strictly defined (2.5); finally, two “institution-participated” reversal structures (2.6) and a liquidity exhaustion pattern (2.7-2.8) are discussed.

2.1 Swing High / Swing Low: The Smallest Unit of Structure

Figure 2-1 Swing points and trend language Figure 2-1 Swing points and trend language— Three-candle definition (middle one highest/lowest); Uptrend = higher highs and higher lows succeeding each other; each structural break (BoS) breaks the high in the trend direction, while sweeping the buy-side liquidity above the old high along the way.

Swing High (SH): A candlestick whose high is higher than the highs of the adjacent candles on both its left and right sides. The simplest version is three candles: the middle candle’s high is the local maximum.

Swing Low (SL): Mirror image—the middle candle’s low is the local minimum, lower than the lows of the candles on both sides.

Why such a simple three-candle pattern deserves its own section? Because swing points are the atoms of all subsequent structural analysis:

• It is the coordinate of liquidity. Chapter 1 said stop-losses pile up outside every local extreme—swing points are the precise addresses of these “fuel depots.”
• It is the trace of handover. Price forming a swing high somewhere means that up to that point, buying pressure was overcome by selling pressure—likely an institution completed a sell delivery there.
• It is the marker of imbalance. The move towards the swing point is often one-sided, without sufficient two-way trading (Chapter 3 will formally define “imbalance”); the algorithm will later return to handle it.

Practical application: On the time frame you trade, from right to left, mark all swing highs/lows that satisfy the three-candle definition. These points are your anchors for drawing liquidity pools and all subsequent reference points.

2.2 The Language of Trends: Four Swing Relationships and Structural Breaks

Connect adjacent swing points, and you get the standard description of a trend:

• Uptrend: Swing highs each higher than the last (Higher Highs, HH), swing lows each higher than the last (Higher Lows, HL).
• Downtrend: Swing highs each lower than the last (Lower Highs, LH), swing lows each lower than the last (Lower Lows, LL).

Break of Structure (BoS): Price in the direction of the current trend breaks through the most recent swing point—either making a new higher high in an uptrend, or a new lower low in a downtrend. BoS is a trend continuation confirmation signal: the old structure isn’t broken, just advanced another step.

Note a hook planted in Chapter 1: Each structural break is also a sweep of liquidity outside the swing point. The moment an uptrend makes a new high, the buy-side liquidity above the old high is swept—so “trend continuation” and “stop hunt” are often two sides of the same candle. Distinguishing which side it is relies on displacement (2.4) and structural position (2.5).

2.3 Three-Level Nesting: Short-Term → Intermediate-Term → Long-Term Swing Points

Figure 2-2 Three-level nesting of swing points Figure 2-2 Three-level nesting of swing points— Green/red small dots are short-term highs/lows (STH/STL), blue dots are intermediate-term highs/lows (ITH/ITL: a short-term high whose adjacent short-term highs on both sides are lower), orange dots are long-term highs/lows (LTH/LTL); the higher the level, the greater the significance when broken.

Swing points satisfying the three-candle definition are all over the chart, but their importance varies. ICT uses a recursive definition to divide swing points into three levels:

• Short-Term High/Low (STH / STL): Any swing high/low satisfying the three-candle definition. Most numerous.
• Intermediate-Term High/Low (ITH / ITL): A short-term high whose adjacent short-term highs on both sides are lower, i.e., “a swing high among swing highs”; intermediate-term lows are mirror image (a short-term low whose adjacent short-term lows on both sides are higher).
• Long-Term High/Low (LTH / LTL): An intermediate-term high whose adjacent intermediate-term highs on both sides are lower; long-term lows are mirror image. Least numerous, greatest weight.

The significance of this nesting:

• Level determines consequence. A short-term low being broken might just be intraday noise; an intermediate-term low being broken is a structural event worth serious attention; long-term highs/lows typically only change hands during major daily-level turns.
• Level determines stop-loss and target anchoring. Institutional-level stop hunts target stop-losses outside intermediate-term swing points—where trend followers place their large stop-losses, not the flotsam on a 1-minute chart.
• Fractal self-similarity. The same three-level structure holds on any time frame: a monthly short-term high might be a daily long-term high. Price is fractal—what you see on monthly charts is also playing out on 5-minute charts.
• A leading signal: If an intermediate-term high’s internal range is “re-walked” by price (called a Rebalanced ITH), it indicates the market is extremely weak—institutions are “showing their hand” to those who understand; by analogy, a rebalanced intermediate-term low suggests extreme strength. Similarly, if an intermediate-term high fails to be significantly higher than the adjacent short-term highs, it is also a sign of weakness.

2.4 Displacement (Displacement): The Signature of Institutional Participation

Figure 2-3 Displacement vs. Lack of Displacement Figure 2-3 Displacement vs. Lack of Displacement— Left: large body + close crossing through + leaving a fair value gap = true signal, follow the direction; right: small body brushing past, immediately retracting = false move, trade against it (in the original direction).

Displacement: A participant with massive capital entering with clear intent, pushing price quickly and significantly in one direction. The chart features are unambiguous:

• Consecutive large-body candlesticks (body much larger than recent average);
• Fast speed, almost no retracement along the way;
• Closing price cleanly and decisively crossing a key swing point (not just a wick touching);
• Leaving a price gap during the advance (i.e., the Fair Value Gap in Chapter 3—during consecutive large-body advances, there’s no time for two-way trading between candles).

An easy-to-remember analogy: Displacement should be “like an elephant jumping into a children’s pool”—the commotion is impossible to mistake.

Why displacement is so important: It is the dividing line between true and false moves. Retail chasing highs/lows cannot push out displacement; only institutional order flow can create this kind of force. Therefore:

• Price breaks a swing low + has displacement → institutions are truly selling, this break is “true”;
• Price breaks a swing low + no displacement (small body brushes past, immediately retracts) → no institutional follow-through, this break is likely just a stop sweep, and the original direction will continue.

Lack of Displacement reverse application—this is the half new traders most easily overlook:

• In an uptrend, a low is broken but no downward displacement appears → this is a “false break, true sweep” → opportunity to long in trend direction;
• In a downtrend, a high is broken but no upward displacement appears → false break → opportunity to short in trend direction.

Mantra: With displacement = true signal = follow it; Without displacement = false move = trade against it (follow original direction).

2.5 Market Structure Shift (MSS)

Figure 2-4 Structural Break vs. Structural Shift comparison Figure 2-4 Structural Break vs. Structural Shift comparison— Left: breaks old high in trend direction and continues (trend continuation); right: first false break sweeps buy-side liquidity, then closes below swing low with displacement (structural shift), the displacement segment leaves a fair value gap.

With displacement, we can strictly define this system’s trend reversal signal:

Market Structure Shift (MSS): Price breaks through a key swing point counter to the current trend direction, accompanied by displacement.

• Bearish MSS: In an uptrend, price first pushes above an old high (sweeps Buy-Side Liquidity BSL), then quickly reverses, breaking the nearest swing low with displacement.

Figure 2-5 Bearish Market Structure Shift Figure 2-5 Bearish Market Structure Shift— Pushes above old high sweeping buy-side liquidity → quick reversal, breaks swing low with displacement → the fair value gap from the displacement segment becomes the entry zone for selling on a pullback (around the midpoint CE).

• **Bull