Internal & External Liquidity Model - ICT Concepts

How's it going everyone? This video is going to be about building a model based off of internal and external liquidity concepts.

Now if you don't know what internal and external liquidity is, please go ahead and check out the video linked in the top right before watching this video.

For those of you that do, we will go ahead and hop into a PDF, quickly review, and then talk about the model. Let's get started.

Now the first thing you need to understand is what is internal liquidity? Internal liquidity is just a fair value gap.

Now if you don't know what a fair value gap is, we will quickly review that, but I also have a video on that as well.

It is just a three candlestick pattern, one, two, three, in which the wick of the first candle and the wick of the third candle do not overlap, showing aggressive price action through this area.

So you can see one, two, three, these candles do not overlap.

Now the next thing to understand is what is external liquidity? External liquidity is simply highs and lows.

So you can see here we have a range, we have a swing high here, we have a high with a lower high on each side creating a high.

So that is external liquidity. Similarly down here we have a low with a higher low on each side, creating a swing low.

So this is external liquidity or sell-side liquidity and buy-side liquidity.

Now the next thing we're going to cover is the relationship between the two.

So since price swept and could not displace through, this external liquidity is likely to reach back where?

Internal liquidity. Now that price reaches internal liquidity, it's respecting the fair value gap.

And you can see this closure here. Where do we expect it to go, external liquidity.

So you can see price moves from external to internal and back to external.

So now let's take a look at the actual model. So this model is just going to use a higher time frame level.

Dropping down a time frame, I will look for internal or external liquidity.

Then on the lower time frame, I will look to make sure I'm in a kill zone. I have a stop rate, a market structure shift, a fair value gap, and then I will target to R.

So for an example of this, when we swept this external low and looking for price to trade to internal.

And on the lower time frame, we get a market structure shift, a fair value gap, and targeting 2R on the way to this fair value gap.

Let's go ahead and hop into trading view and go over a few examples of this.

So here we are on NQ daily chart, and you can see that we took this low right here.

Now with this super aggressive close down here, I'm not expecting retracement right away, so I'll let a few candles form.

Now if we're going to mark this out, we have a low with a higher low on each side forming a swing low.

Now let's see what the next candle does. We get aggressive displacement up, violating this fair value gap right here.

So if I'm going to look for external to internal, I have a fair value gap resting right here, right around discount of this range here.

So using that as my draw on liquidity or looking for price to draw to this higher time frame level, I'm going to drop down to the hourly chart.

So zooming in here, you can see here we have a candle where this wick does not overlap with this wick.

So it is a fair value gap. It is also the new day opening gap. So having this marked out as our fair value gap.

Let's see, now that we have internal liquidity, if price reaches into it during a kill zone, can we frame a trade?

So here we are going through London. So now that price reached into this fair value gap, if it is going to continue to trend higher, and this is going to form a swing low,

I'd anticipate price going from internal to external liquidity.

So now that we have our higher time frame draw, which is this daily fair value gap, and then dropping down a time frame, we have a move from internal to external liquidity.

Let's drop down another time frame and see if we can find a setup.

So down here on the five minute chart, you can see we reach down into the hourly fair value gap and we come back up and shift market structure here.

So now I'm looking for the fair value gap. and if you notice we have a fair value gap here as well as a fair value gap here.

So looking to take an entry I'm going to take an entry on the start of this fair value gap but I want to allow it to be able to trade down into this fair value gap.

So I'll put my stop on this fair value gap Campbell's low.

Then I'll be looking to target 2R which you can see is just at these highs.

Even though I could target 3.16R with a total run to the fair value gap I'm just going to be looking at 2R, and I could hold the runners if I want to.