ICT Mentorship Month 02: What Are Market Maker Traps and False Breakouts?

TL;DR

A market maker trap occurs when price breaks beyond a consolidation to neutralize stops before moving toward liquidity aligned with the underlying market condition. In a bullish market, price may run sell stops below the range to pair smart-money long orders, then expand toward buy stops above an old high. This eighth and final ICT Mentorship Month 02 teaching explains how that liquidity model can clarify directional bias.

Transcript

okay folks welcome back this is the eighth and final teaching for the second month of the ict mentorship this is month october we're dealing specifically with market maker traps of false breakouts and we'll talk about specifically uh in this teaching uh one side of the marketplace just for the sake of saving time everything that we show you will be... Read More

Key Insights

• False breakouts above consolidation generally manifest in primarily bearish markets, while false breakouts below consolidation generally manifest in primarily bullish markets. The market maker focuses on one side to run the stops resting there, matching the underlying directional condition.
• Breakout and neophyte traders bracket a trading range with buy stops above the old highs and sell stops below the old lows because they have no idea what direction price will go, hoping to react to whatever the market gives them and catch a trend.
• In a bullish market, smart money drives price below the consolidation to run sell stops. Those sell stops are used to pair their long orders, meaning smart money is buying from traders who get stopped out on the downside break.
• Smart money exits long positions where willing buyers exist, which is always above the highs in the form of buying breakouts or buy stops on short positions. That is where the liquidity is that lets them book profit or hedge.
• The number one driver in price action is liquidity. The market will always seek liquidity, and the most recent untapped area of liquidity reachable with the least resistance gives you the directional bias as a trader.
• Liquidity rests above the bodies of the candles, not the wicks, because the bodies contain the most volume. When identifying where buy stops sit above an old high, traders should reference the candle bodies as the primary target.
• Market makers scale into positions by buying a little higher each time and work their orders in while still offering opportunities to scale off and profit, letting both hedgers and bank-level speculators operate the same bullish model.
• Rather than vilifying market makers for stop runs, understand they are doing their job of providing liquidity. Traders who lack understanding misattribute these moves to their broker instead of recognizing the liquidity mechanism at work.

Questions & Answers

Q: What is a market maker trap or false breakout?

It is a move beyond a price consolidation that neutralizes the stops resting outside the range. Breakout traders may be drawn into the initial break, while price subsequently moves toward liquidity consistent with the underlying bullish or bearish condition.

Q: When does a false breakout above a consolidation generally occur?

A false breakout above a consolidation generally appears in a primarily bearish market. Market makers send price above the range to neutralize buy stops before the expected lower trajectory continues.

Q: When does a false breakout below a consolidation generally occur?

A false breakout below a consolidation generally appears in a primarily bullish market. Price moves beneath the range to neutralize sell stops, which can be used to pair smart-money long orders.

Q: Where do breakout traders place orders around a trading range?

They commonly place buy stops above the old highs and sell stops below the old lows. This brackets the range so they can buy a breakout on strength or sell short a breakout on weakness.

Q: Why are sell stops run below consolidation in a bullish market?

Those sell stops provide orders that can be paired with smart-money long orders. Smart money buys as stopped-out traders and downside breakout traders supply the selling liquidity below the range.

Q: How does smart money exit long positions and book a profit?

Smart money needs willing buyers when exiting long positions. Buyers are found above old highs through long breakout orders and buy stops on short positions, allowing long positions to be scaled out, hedged, or closed for profit.

Q: How can liquidity help determine directional bias?

The teaching identifies liquidity as the primary driver of price action. After sell stops beneath a consolidation are taken in an underlying bullish market, the buy stops above an old high become a logical price objective.

Q: Does the false-breakout model also apply to bearish markets?

Yes, the teaching says the demonstrated buying model can be reversed for a bearish market. Instead of running sell stops below consolidation and expanding upward, the bearish condition focuses on buy stops above consolidation and an expected move lower.

Summary & Key Takeaways

• This eighth and final teaching of Month 02 of the ICT mentorship, distributed October 2016, covers market maker traps and false breakouts. Only one side of the marketplace is shown to save time; everything demonstrated simply reverses for the opposite market condition.

• When a market enters a trading range, breakout traders place buy stops above the highs and sell stops below the lows. Market makers send price to one side to neutralize those stops, running sell stops in bullish markets and buy stops in bearish markets.

• In a bullish example, price repeatedly drops below consolidations to absorb sell stops as counterparties for smart money longs, then expands up to buy stops above old highs where positions are scaled off for profit. Price invariably seeks liquidity, which defines directional bias.