This lesson covers the concept of inducement, a key tactic used by Smart Money to trap retail traders and build liquidity.
What is Inducement?
Inducement is a strategic price movement, often engineered by Smart Money, designed to lure or "induce" uninformed traders into taking positions in a seemingly obvious direction. Once these traders have committed to their positions (and placed their stop-losses), the market reverses, taking out their stops and providing the necessary liquidity for Smart Money to execute their larger orders.
It's a more subtle form of liquidity grab. Instead of just a quick spike (stop hunt), an inducement can look like a convincing, albeit temporary, structural break.
Common Forms of Inducement
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Inducement of a High/Low:
- In a downtrend, price will often make a small pullback, creating a minor swing high. It will then trade just above this minor high, inducing traders who see a "break of structure" to go long.
- Once these buyers are in, the market continues its true bearish direction, stopping them out.
- The reverse is true in an uptrend, where price will trade just below a minor swing low to induce sellers before continuing higher.
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False Breakouts:
- Price breaks out of a well-defined range or consolidation pattern with what appears to be a strong candle.
- This induces breakout traders to enter.
- The market then quickly reverses back into the range, trapping these traders. This is often called an "Upthrust After Distribution (UTAD)" or a "Spring" in Wyckoffian terms.
The Psychology of Inducement
Inducement plays on common retail trader psychology:
- FOMO (Fear Of Missing Out): Seeing a breakout, traders jump in without confirmation, fearing they will miss the move.
- Basic Breakout Strategies: It targets traders who use simple, textbook breakout strategies without understanding the deeper context of liquidity.
- Misinterpretation of Market Structure: It preys on traders who mistake a minor, internal structure break for a major shift in trend.
How to Identify and Navigate Inducement
- Identify the True Structural Points: Learn to differentiate between significant, external market structure highs/lows and minor, internal ones. An inducement often targets the minor, more recent swing points.
- Wait for Confirmation: Don't trade the initial break of a minor high or low. Wait to see if the market continues in that direction or if it reverses, showing the break was just an inducement.
- Look for Points of Interest (POIs) Beyond the Inducement: Often, the true institutional entry zone (like a valid Order Block or FVG) lies just beyond the level that was used for inducement. Price takes out the inducement level and then trades into the true POI before reversing.
Conclusion
Inducement is a sophisticated concept that highlights the predator-prey dynamic of the market. By understanding that not every structural break is genuine, you can learn to be more patient and selective with your entries. Instead of being the liquidity, you can start to identify where liquidity is being targeted and look for opportunities to trade in alignment with the true institutional move that follows.
Next, we will discuss another form of liquidity engineering: Equal Highs and Lows.