#intermediate trader

What is Institutional Candle?

The institutional candle is the last opposing one or multiple close candles before a strong directional move. So, late buying or selling candles with one or more candlesticks run out of liquidity before heading in the intended direction are called institutional candles. It means institutions sell before buying and buy before selling. That’s why the institutional candle is also called ‘Bankers Candle.’ It is one of the most popular smart money forex trading concept.

Basically, it is the manipulation phase or tricky area where big banks, institutions manipulate the market for liquidity. You can easily identify this institutional candlestick pattern in charts with your naked eye. You don’t need any institutional candle indicator to look for it.

Why do institutional candles form?

Whenever there is a buyer, there’s must be a seller. So, there must be somebody on the other side to take the trade. That’s why market moves and institution candle comes to play as a fishing worm of smart money to grab the liquidity.

Generally, the stop loss is placed above the swing high (For sell order) and below the swing low (For buy order). When institutions, big banks want to sell, they need buyers. Right? So they breach the immediate high with a big bullish candle with small or no wick. You might see one big candle push in 4H, but multiple candles push in the 15M or 5M timeframe. Remember, in the formation of institutional candles, the number of candles is not important. It may be one or more. The crucial thing is the intention of the candles or push; which is to run out of liquidity.

However, the stop losses of early sellers are triggered by this push, which is placed above the high. We know the seller’s stop-losses are the buy stop orders. Besides, the buy stops of breakout traders also exist above the high. It has also triggered their deliberate buy-stop orders. Then institutions grab all the unwilling & willing buy orders as liquidity, and their intended bearish market movement has started.

The same case happens in the bullish move. price breaches the immediate low/support with a big bearish candle with small or no wick. It can be multiple candles as well. The stop losses of early buyers are triggered which are placed below the low/minor SR line/support. We know the buyer’s stop-losses are the sell stop orders. Besides, the willing sell stop orders of breakout traders also exist below the support, which are also been triggered. Then institutions grab all the unwilling and willing sell orders as liquidity, and their intended upward market movement has been started.

So, the agenda of the institutional candle is to take out the liquidity above or below the immediate SR line.

Why do institutional candles work?

The institutional candles work because these are the drawdown of smart money.

So, when the price comes back to the zone, they close the order with a small loss or break-even. As they mitigate their position, these are the best place to trade and make some profit along with smart money.

Why institutional candle is important?

Institutional candle helps you to determine order flow and market structure. It is also a popular entry strategy. 

This supply zone is considered very strong. The strength of the move out of the supply zone shows that this zone has a large pile of unfilled orders.

The overall trend is down. Price has created a series of lower highs and lower lows, which confirms the downtrend movement.

Now, we move to the daily chart where we will execute our trade. We identify the daily supply and demand zones around the current price and we look for a zone to place our limit order and our take profit.

Price is approaching the daily and weekly supply zones. We expect the price to test these overlapping zones and move down to test the daily demand zone.

Our sell limit order is placed at the proximal line of the daily supply zone. The stop order is placed above the distal line of the daily supply zone.

Price created a nice drop-base-drop with large ERC (Extended Range Candle) type of candles. This shows the strength of the supply zone. We also have a nice reward-to-risk ratio of more than 1:3 giving us a good winning opportunity if price retraces back up and test the supply zone.

A score of 10/10 means that we will place a limit order at the proximal line of the supply zone and a stop loss order at the distal line. And wait for price to retrace back up.

Indeed, price went back up and hit our limit order and went down.

Odd Enhancer 1: Strength of the Move

Good supply and demand zones have a strong move out of the zones. Here we are looking at how the price left the zone.

Did the price leave with strong large candles or many small candles?

We will score this from 0 to 2 point maximum.

As a trader, you should avoid trading weak zones because price will ignore it and pass through it.

Odd Enhancer 2: Time Spent at the Zone

The second odd enhancer that we look at is the time that price spends at zone. Good zones have between 1 to 6 candles in the base. 

Beyond 6 candles the zone might be weak and therefore, resulting in a losing trade.

Odd Enhancer 3: Fresh Levels

The third odd enhancer is to check whether the zone is fresh or not.

A fresh zone is a zone that has not been tested by price. As price keeps coming back and testing the zone, the probability that this zone will work decreases.

After a second retracement to the zone, it is better not to consider it because there might not be enough supply to push the price lower again.

Notice that price penetrates deeper inside the supply zone with each retracemnet. This is a good signal that shows whether the zone is still valid or not.

Odd Enhancer 4: Reward-to-Risk

The last odd enhancer is the reward-to-risk ratio. 

We need at least a ratio of 1:2 to consider the zone as valid for trades.

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As a rule of thumb, a final score of 10 out of 10 means that we will place a limit order and wait for price to hit our entry target.

Now we need to assess whether the basing structure is valid or not. The structure of the base is crucial to successfully select the best zone to draw your lines. Ideally, we need to choose a base with less than six candles to be considered an excellent base structure to trade.

Example

In the supply zone, we have one candle at the basing structure. To draw the supply zone correctly, we place the distal line at the highest wick of the base. Then we place the proximal line at the low of the body of the base as shown in the chart above.

Price moved down creating a demand zone with three candles at the base. To draw the demand zone correctly, we place the distal line at the lowest wick of the base. Then we place the proximal line at the highest body of the base candles.

If you decide to include both the high and the low of the wicks, you have increased your risk by making your stop larger than it should be.

If you decide to include only the highest wicks for the supply zone and only the lowest wicks of the demand zone, you are decreasing your odds of getting your order filled by the market price.

Moderate volatility

A supply zone typically shows narrow price behavior. Lots of candle wicks and strong back and forth often cancel a supply zone for future trades.

The narrower a supply/demand zone before a strong breakout is, the better the chances for a good reaction the next time typically.

Timely exit

You don’t want to see price spending too much time at a supply zone.

Although position accumulation does take some time, long ranges usually don’t show institutional buying. Good supply zones are somewhat narrow and do not hold too long. A shorter accumulation zone works better for finding re-entries during pullbacks that are aimed at picking up open interest.

Narrow and short accumulation zones, followed by a strong breakout, are more meaningful.

Strong force leaving the zone

At one point, price leaves the supply zone and starts trending. A strong imbalance between buyers and sellers leads to strong and explosive price movements.

As a rule of thumb, remember that the stronger the breakout, the better the demand zone and the more open interest will usually still exist – especially when the time spent at the accumulation was relatively short.

When price goes from selling off to a strong bullish trend, there had to be a significant amount of buy interest entering the market, absorbing all sell orders AND then driving price higher – and vice versa. Always look for extremely strong turning points; they are often high probability price levels.

Strong turning points can offer great re-entry opportunities.

Freshness

If you trade of supply areas, always make sure the zone is still “fresh” which means that after the initial creation of the zone, price has not come back to it yet.

Each time price revisits a supply zone, more and more previously unfilled orders are filled and the level is weakened continuously. This is also true for support and resistance trading where levels get weaker with each following bounce.

Amateur squeeze

The Rally-Range-Drop scenario describes a market top (or swing high), followed by a sell-off. The market top signals a level where the sell interest got so great that it immediately absorbed all buy interest and even pushed price lower.

The amateur squeeze allows good and patient traders to exploit the misunderstanding of how market behavior of consistently losing traders. It is reasonably safe to assume that above a strong market top and below a market bottom, you’ll still find big clusters of orders; traders who specialize in fake breakouts know this phenomenon well.

The spring looks like a false breakout after the fact, but when it happens it traps traders into taking trades into the wrong direction. Institutional traders use the spring to load up on buy orders and then drive the price higher.

After identifying a strong previous market turn, wait for price to come back to that area. If a false breakout occurs, the odds for seeing a successful reversal are extremely high.

The two small blue arrows on the chart show the creation of the first two tops in the supply zone. We will look for Short trades that interact with that level.

The USD/JPY could be sold after the bounce as shown with the first green arrow on the chart. The price starts decreasing afterwards. Soon after, a swing low is created and we see a sharp price move to the upside. This area subsequently forms a solid demand zone on the chart.

The price returns to the supply zone for a re-test afterwards. See that the USD/JPY bounces sharply in the bearish direction. This creates another short opportunity on the chart. The pair could be sold again after the bounce from the level. After the price decreases, it reaches the magenta demand level on the chart, creating another bounce. The second short trade could be closed when you recognize the bounce from the magenta demand line.

The price returns to the supply zone and bounces again downwards. This leads to a new price decrease. However, this time the price action creates a strong market gap down and almost goes through the already established demand zone, meaning that the bearish force is stronger than usual. In this case you would have had a sufficient reason to hold the trade on the assumption that the selling pressure has taken over, and the pair is entering a bearish trend.

We use the big bearish yellow trend line to measure the intensity of the downwards move. Then we hold the trade until the price action breaks the yellow bearish trend line. The last red arrow shows the moment when price breaks thru the trend line to the upside, which would be a valid signal that the trade needs to be closed.