Understanding The Power of the Three-Strategy in ICT Trading
The ICT Power of 3 is a popular trading strategy with accumulation, manipulation, and distribution phases. Learn how to use it and make good profits.
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The power of three is a must-try strategy for ICT and smart money traders. You can actually make a good profit using the trade style. Just watch the smart money players, identify manipulations, and place trades in the right direction.
Being a leading broker, Beirman Capital wants you to stay aware of all trading strategies. In our blog, we will discuss what the power of the three trading strategy is, with its phases, how to use it, pros, and cons.
What is the Power of Three Trading Strategy?
The Power of Three strategy is based on three phases: Accumulation, manipulation, and Distribution. The style is amongst the top ones and is developed by Michael J. Huddleston, a popular ICT trader.
The POT strategy is entirely based on smart money activities. Under this, traders watch the smart money and predict the price movements. All three phases have different features that provide traders with the direction for their trading journey.
3 Phases of POT Strategy
Accumulation:
The first and most important phase of the POT strategy is accumulation. Under this, big market players build their position without affecting the price of the asset so much.
The price generally moves within a narrow range. The smart money players at this stage positioned their trades without causing a significant change in the asset price.
Accumulation is a move to deceive the retail traders and create an environment so that retail traders end up opening a position. For early identification of the accumulation phase, watch the following elements:
- Low Volatility: Volatility is the rate of price change, and it is usually low during the accumulation phase. The asset price moves within a consolidated range at this stage.
- Consolidation: Price moves within a narrow range without breaking the key levels.
- Significant Volume: The volatility may be low, but the volume is high. Smart money traders are accumulating positions that signal for potential price move. As a result, the number of people buying or selling increases.
- Key Levels: Accumulation generally occurs when the prices are near the key levels. So watch whether the price is near support or resistance or not.
Manipulations:
Accumulation is followed by the manipulation phase. At this stage, the real game begins. The smart money deliberately moves the price, triggering the stop loss of retail traders.
It’s a sharp, misleading, and manipulative move that fools or traps the retail traders. Here are the factors to identify it:
- Sharp Price Moves: The price can observe a sharp move in the opposite direction of the predictive trend. Like in bullish manipulation, price dips below the range, while in bearish manipulation, price moves above the range.
- Stop Loss Triggers: At this stage, the majority of retail traders’ stop losses get triggered. The manipulation and sudden change trap retail traders into closing their positions.
- Liquidity: Liquidity is the ease of opening a price at a favorable price. By manipulating the trades of retail traders, smart money creates an environment to position its traders at the desired price.
- False Breakouts: The sharp and sudden moves are likely to get reversed. So the chances of false breakouts are there.
Distribution:
The Distribution phase is when the smart money starts offloading their positions. It ultimately leads to a price movement in the desired price direction. Here are the key features of the Distribution phase:
- Sharp Movement: Like the manipulation, the even distribution phase also observes sharp movements. For a bullish setup, price moves in a strong upward direction, while for a bearish setup, price moves in a strong downward direction.
- Increased Volume: Due to sharp moves, many traders end up placing buying or selling trades that lead to increased volume.
- Clear Trend: The Distribution phrase is accompanied by a clear and strong trend. Also, the price moves in the accumulation phase direction, which throws light on smart money activity.
How to Use the 3 Power Trading Strategy
You have learned about the three phases of strategy and how to identify them. However, how to trade using the strategy is still an important question. Here is how:
Organize Price Action Analysis:
The first step is to analyze the current price movements of the asset. Watch the chart, identify the price trends, determine the strength of the ongoing trend, and watch the support and resistance levels.
This will help you understand the asset price value. It ultimately assists you in identifying the accumulation phase. If the price is moving in a consolidated range accompanied by increased volume, it can be a sign of accumulation.
Determine Manipulation Phase:
The Accumulation phase is followed by sharp moves in the opposite direction. At this stage, the stop loss of most traders gets triggered.
So watch for significant price moves. And avoid taking trades at this stage, as the smart money has manipulated the market conditions to trap retail traders. You can use technical analysis indicators to identify price manipulation activities.
Identify Trading Opportunities:
A distribution phase is where traders can identify potential buying or selling opportunities. As this stage as smart money offloads positions, the price again starts moving in the accumulation phase direction.
So, during a bullish setup up traders can consider opening a buy position expecting a price rise, and during a bearish setup up traders can consider opening a sell position expecting a price fall.
Place trades:
Now, once you have identified the direction to place trades, plan your trade entries. You can set the stop loss beyond the manipulation wick. Also, you can set the take profit and stop loss either by using a risk-to-reward ratio or by plotting technical analysis indicators.
Pros of PO3 Strategy
- ICT traders can use the PO3 trading strategy to make enhanced decisions. Traders can identify the manipulative moves of institutional players and plan the trades accordingly.
- Using the PO3 strategy, retail traders can save their trades from hitting the stop loss. Also, at the distribution phase, they can even make good profits.
- The PO3 knowledge results in ease in entering and exiting positions, and enhances the position sizing and risk management.
Cons of PO3 Strategy
- The power of three is a complex strategy and requires an in-depth understanding of the market. In addition, a traders need to have clarity on smart money and ICT concepts.
- The manipulation phase is where even the most experienced traders get trapped. Thus, you need to be quite vigilant and patient while using this strategy.
Bottom Line
The power of three trading is undoubtedly a rare yet profitable strategy. It is helpful not only for traders looking for potential opportunities, but you can also save your existing trades from manipulation.
Smart money very well knows how retail traders will react in different market conditions. Therefore, they manipulate it and turn the price to their advantage.
However, the knowledge of the power of the three trading strategies helps you in decoding the manipulations. And you can even make potential money by determining the trend direction effectively.
Want to Practice POT Strategy
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The Power of Three strategy is based on three phases: Accumulation, manipulation, and Distribution. Traders identify accumulation, track manipulation, and place trades at distribution.
The Power of Three strategy is used in the market. It is based on the ICT smart money concept of three phases: Accumulation, manipulation, and Distribution.
The rule of 3 states that not take more than 3% of your trading capital.
Power of three is a type of ICT trading strategy that is used for day trading.
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