Liquidity
Liquidity, or what the market algorithm looks at when deciding where to go next!
Liquidity (in this concept) refers to areas (ranges) in price that were formed in the past and act as a magnet for the price. We'll explore more specific examples later. For now, just keep in mind the phrase "magnet for the price."
Equal highs and equal lows (EQH/EQL) represent clusters of liquidity in the form of a large number of stop orders. Why do we need to understand stop orders? Because they are the bread and butter of smart money (the algorithm). Where most traders' orders are located is where our target and price predictions lie.
To make a trade to buy/sell an asset, there must be opposing orders. The opposite order for a buy is a sell, and for a sell, it's a buy. There may not be enough opposite orders to buy/sell the required volume of the asset at a certain price. In this case, the total volume will have to be divided according to market supply, and prices will change depending on the supply volume. Confused?
Liquidity in the market can be thought of as the speed and ease with which you can exchange something for money. If something exchanges easily, like a chocolate bar at school recess, it's liquid. If it's something difficult to exchange, like an old toy, it's less liquid. Basically, liquidity tells us how quickly we can "turn" an asset into money.
To avoid spoiling the average entry price for the entire volume, you need a large number of opposite orders, which can be the stop orders of other market participants.
To accumulate a position for a rise, the stop order would be a “Sell.” A large number of such "Sells" will help easily accumulate the required volume without affecting the price.
Notice the example above. The price showed weakness toward selling, most traders opened long positions, and the asset price rose. During the rise, the number of traders making trades increased. Most placed stop orders behind the nearest swing, as the price could not go below that level.
After accumulating liquidity, the price returned, stop orders were triggered. At this point, opposite orders accumulated a large position for the rise. Then the price followed an upward trend.
Thus, the major player accumulated the necessary volume without increasing the average purchase price. Through these manipulations, large positions are accumulated. This not only helps gather enough volume but also leaves other market participants without a position.
The chart shows a pronounced local downward trend. As the price fell, more participants opened short positions, placing their stop orders at various price levels.
Then there was a manipulation to collect liquidity, and the price continued to move upward. It is fair to say that the price goes to where the greatest amount of liquidity (orders from market participants) is concentrated. At the same time, liquidity is not only a tool for position accumulation but can also serve as "fuel" for further momentum. For the same reason—opposite orders. Stop orders for short positions are buys. This reduces the volume needed to break the level, as opposite orders are activated, and there are no major sellers in the market.
How is liquidity used in trading?
1. Liquidity can serve as an entry point into a position in the direction of the main trend.
2. We will use liquidity as a trade target, within which the position will be closed. In other words, predicting price movement and choosing the most likely direction, either up or down.
3. We cannot say for sure which liquidity the price will target.
We will use liquidity as a trade target, within which the position will be closed. In other words, predicting price movement and choosing the most likely direction, either up or down.
EQH/EQL Equal highs and lows (EQH/EQL) are clusters of liquidity in the form of a large number of stop orders. Think of support and resistance levels.
Such a liquidity pool will be a strong magnet for the price. This happens because most people trading classic technical analysis place their stop orders behind such visible levels. The major player intentionally leaves these zones to later use the accumulated liquidity for further movement.
After forming equal highs, the price began to move in the opposite direction, prompting uninformed traders to place stop orders behind that level.
We see the price returning to break that LEVEL. The accumulated liquidity above the formed level served as "fuel" for further growth.
1. EQH/EQL don't have to be perfectly level. A slight slope (within reason) is allowed. This slope should follow the rule:
- For EQH, the left high is higher than the right.
- For EQL, the left low is lower than the right.
2. It's important to understand that EQH/EQL form between the swings of a substructure, not between two candles on the chart.
EQH/EQL help find a trade target and indicate when not to enter a position.
BSL (buy side liquidity) - liquidity as a target for buyers.
SSL (sell side liquidity) - liquidity as a target for sellers.
These are key levels of interest to major players, as many stop orders from other market participants are located behind these levels.
After breaking such key levels, a price reversal often follows, as the targets have been reached, and further price movement no longer makes sense.
BSL/SSL can be:
1. Opening/closing levels of trading sessions.
2. Opening/closing levels of the previous day/week/month.
3. Internal and external liquidity.
The first two points relate to more advanced future topics that require understanding context. In this topic, we will discuss internal and external liquidity.
Internal and external liquidity
Internal liquidity is located within a sideways movement or impulse formed between the structural high and low on the corresponding time frame.
External liquidity is located beyond the boundaries of the sideways movement and at the structural highs and lows of the corresponding time frame.
Within a structural impulse, the price moves from liquidity to liquidity. As "old" liquidity is taken, "new" liquidity forms, and so on. This continues until the price takes one of the external ones.