Introduction to Liquidity in Trading

Liquidity is the lifeblood of the markets. Liquidity is what allows anyone to buy or sell
for a profit, or a loss. It is what creates opportunity in the markets. While liquidity may
not hold much significance for a retail trader, it is of paramount importance to big
players who must carefully consider it in order to execute positions successfully. In an
illiquid market, there are few buyers and sellers, and trades may take longer to
complete, and prices can be more volatile.

What does "liquidity" refer to in our trading?

In the trading market, we can categorize participants into two primary groups. While
some arguments might suggest the presence of three or more groups, I'll simplify it into
two main categories.

The first group comprises central banks, algorithms, and institutions. The second group
consists of retail traders in the US.

The influence over market funds is primarily held by the first group. When this group
aims to manipulate the market, they require willing buyers who would buy assets at the
specific prices they intend to target.

For instance, if their goal is to decrease the price by $250, they need individuals ready to
buy from them at that designated price point.
 [credit to @menda_crypto]

Why do retail traders choose to buy or sell at these specific areas?

Retail traders often place their trades in relation to these areas due to the placement of
their stop orders. When a retail trader initiates a long position, they commonly set a
stop order that triggers if the price reaches a certain level. This stop order, when
activated, effectively closes the long trade, and simultaneously opens a short trade. This
occurrence is referred to as a "long stop" and the resulting short trade contributes to
what is known as "Sell Side Liquidity (SSL)."

Conversely, when retail traders enter a short position, they establish a short stop. Once
this short stop is reached, it triggers a long trade, leading to what is termed "Buy Side
Liquidity (BSL)."

In essence, these trading decisions are often influenced by the positioning of stop
orders, creating liquidity through the automatic opening of opposing trades when
certain price levels are reached.

The first group consistently engages in price manipulation to shape the perception of
retail traders. They often create scenarios where retail traders perceive the market as
bearish when the banks are actually aiming to accumulate buy positions. Similarly, these
banks manipulate the perception of retail traders into believing the market is bullish
precisely when they intend to gather sell positions.
Let's start with some statistics: over 90% of retail traders end up losing money. Trading
is a zero-sum game, where money is not created but rather taken from losers and
handed to winners. To ensure you're on the winning side, it's crucial to understand who
the losers and winners are.

In trading, the losing party often comprises retail traders, while the winning party
usually consists of bigger, wealthier players. This is where liquidity comes into play.
Understanding liquidity can help you make informed trading decisions and align
yourself with the winning side.

Liquidity, derived from the term "liquid," refers to the ability of assets to flow or be
easily exchanged. In an economic context, assets that can be readily converted into cash
are known as "liquid assets." For instance, owning a house may not be considered highly
liquid as it cannot be easily used for purchasing goods. However, you can increase your
liquidity by selling your house for cash, which is why the term “liquidating” is used.
When you liquidate your portfolio, you exchange less liquid assets for more liquid ones,
with cash being the most liquid asset. Therefore, when someone is liquidating, they are
essentially exchanging assets for cash.

To help you better understand what liquidity is, I have drawn some simple diagram. It
illustrates why we refer to certain levels as “liquidity”. The point is not that the models
themselves are liquidity, but that when a certain price model appears, liquidity is
attracted at key levels and price points.
In the figure above, the zones marked in blue are the places where liquidity
accumulates. This is where most trading systems place buy, sell and stop loss orders.

So what is the use of liquidity for us traders? Good question. Liquidity helps us
determine where the price is likely to go next. You can learn to trade only using one
liquidity levels. It's not difficult, but the risks and potential profits will not be so
attractive. In order to get a high-quality trading idea, using the liquidity, you need to
apply the market structure on the HTF, order blocks and Premium/Discount zones (we
will talk about it later in this book). This helps to understand what kind of liquidity will
attract the price and where we should enter into the trade and where we should exit.

Have you ever wondered why some cryptocurrencies or certain currency pairs
experience huge price fluctuations for no apparent reason? Or why you sometimes see
price gaps when looking at a particular pair? It's because of low liquidity in the market
which can lead to a sharp price movement up or down.

Types of liquidity:
 1. Major - major liquidity is buy & sell stops that form at the highs and lows of
each session, day, week, and monthly timeframe charts. Use the weekly,
monthly, quarterly, and yearly charts to build a HTF bias and look at the daily
for where you think the largest pool of liquidity is.
2. Medium - medium liquidity is buy & sell stops that form at the highs and lows
on the 15m, 1h charts. These two timeframes are also the best in my opinion to
look at when it comes to market structure for day traders.
3. Minor - minor liquidity is buy & sell stops that form at the highs and lows on
1m-5m charts. The 1m-5m LTF often has stop hunts after medium or major
liquidity is swept raided. Once liquidity is taken, you're then looking for the
next market structure shift in the opposite direction.
4. Equal Lows/Highs EQL and EQH.
5. Swing Points - significant swing high or low.
6. Range (the market moves sideways) – above highs and below lows in a range.
7. Trendline - liquidity behind the trendline: All liquidity accumulates on highs
and lows and that liquidity is not going to be taken immediately. It remains so
that after taking a large position, the price moves freely and renews the key
high of the structure. All liquidity at the bottom acts as a magnet for price In
the future, the trader can see the formation of equal EQLs.

Why is Market Liquidity so Important?

In a liquid market, you can open and close positions like lightning, with minimal hassle.
It's like having a squad of eager traders ready to take the other side of your trade. And
you know what that means? Less risk, my friend!

When there's high liquidity, you don't have to worry about slashing the price of your
asset to attract buyers or paying a premium to secure what you want. It's a smooth
sailing experience, where sellers easily find buyers and vice versa.
But that's not all. Liquidity plays a big role in determining the spread offered by
leveraged trading providers. See, high liquidity means there's a boatload of orders
flooding the underlying market. And that's good news because it brings the highest
buying price and the lowest selling price closer together. We're talking about a tighter
bid-ask spread.

Now, here's the real deal. Since we base our prices on the underlying market, a narrower
bid-ask spread there translates into lower spreads offered on our platform. It's a win-
win situation! But hold up, if a market is illiquid, brace yourself for a wider spread. It's
like the difference between a narrow street and a wide highway.

So, remember this: market liquidity is crucial for quick trade execution, reduced risk,
and tighter bid-ask spreads. It's the secret sauce that attracts speculators and investors
to the market. Liquidity is the name of the game, my trading amigo!

Buyside and Sellside Liquidity

*Buy and Sell Side Liquidity (BSL/SSL) are areas of price in which buy stops and or
sell stops are mostly residing. If you can understand the higher time frame perspectives
and see where the “money” is, then you have a bias once you see price moving off known
areas of support or resistance. Price will seek the liquidity to either reverse or continue
in within its expansion move.
History of BSL/SSL Trading Strategy

In fact, liquidity in the form of BSL/SSL does not happen suddenly. This happens
because liquidity is a follow-up action at lower TFs for entry, after market makers have
placed orders at significant levels on higher TFs.

BSL/SSL trading is part of a market maker’s strategy in order to buy at a low price and
sell when the price becomes expensive. BSL/SSL price action generally occurs at the
round number level, which is a liquidity area that provides huge profits.

In order for the price to quickly return to the order block at a significant level. Market
makers then perform one of the “bubble bursting” tricks. In general, this trick often
leads retail traders to make the wrong decisions.

If we see price as reversing at the buy or sell side of liquidity, then we trade the
developed price action, if we see price continue to move through the buy or sell side
liquidity.

Retail traders rely on brokers to execute our trades, and let me tell you, our privileges
are quite limited. That's why it's crucial for us to trade smartly and efficiently by
understanding the power of market makers.

On the other hand, we have the banks, the big players in the game. They operate as
wholesalers with massive transaction volumes, allowing them to create significant
supply and demand. They hold the power to move the market according to their well-
crafted trading plans.

Now, let's talk about the retail trader. Unfortunately, many retail traders, especially
beginners, tend to trade based on emotions. It's a rollercoaster ride! Sometimes we're
too slow to make decisions, and other times we're too hasty. Our decision-making
process is often driven by indicator signals and fragile emotions. It's a tough spot to be
in.

To make matters worse, retail traders tend to strictly react to support and resistance
(S/R) areas, following the prevailing S/R strategy. And guess what? Market makers
exploit this tendency to distort retail trader’s perception and hunt for their stop losses.
It's a game they play, and we need to be aware of it.
Now, here's an interesting tidbit: wholesalers, just like any other savvy business folks,
love high liquidity locations. They have tricks up their sleeves to maximize their profits.
One of their strategies is to smooth out their pre-determined trading plan. And guess
what helps them achieve this? You got it, liquidity!

Support and resistance (S/R) levels act as entry points for traders like us. These levels
witness a flurry of buy and sell transactions. So, what do market makers do? They make
these S/R levels easily visible to us traders, and once we're lured in, they liquidate their
positions at those levels. Sneaky, huh?

Liquidity is a vital aspect of trading. It holds great significance for a couple of reasons:

Firstly, the trick to making substantial profits lies in entering the market at favorable
locations and liquidating our positions at the right time. Liquidity plays a key role in
achieving this.

Secondly, liquidity can provide us with clear insights into the direction of future price
movements. Market makers manipulate liquidity to create rejection patterns and
reversals. It's all part of the game.

So, remember, understanding the dynamics between retail and wholesaler perspectives,
the influence of emotions, and the role of liquidity is crucial for navigating the forex
market like a pro.

Bull and Bear Liquidity Traps

Now, let’s look at the most common type of trap: bull and bear liquidity traps. They are
identified very simply - in the market on the higher timeframes, as a clear change in the
structural or turning point of supply or demand. According to the classics, if there is a
bullish structure, that the next high and low is higher than the previous one, it is this
idea that allows a large player to lure traders into buying and then will reverse the price
after collecting liquidity. The same is true for the bearish structure. We do NOT buy at
the break of the old HIGH and we do NOT sell at the break of the old LOW!
Reminder: Daily Chart - locate liquidity and imbalances. Hourly Chart - observe price
seeking liquidity or imbalances.

In other words, liquidity is an established level in the market where stops and orders are
resting, leaving these areas exposed for smart money to hunt these areas taking stop
losses and triggering new buy and sell orders into the market.

The more liquidity accumulates above a significant price level, the more likely that
liquidity will be taken. Where price consistently bounces from the level of support or the
level of resistance several times, there is a huge number of stops of some players and
orders in the opposite direction of other players. It is important to focus on finding such
places, as you can find great entries after liquidity is collected. The more bounces, the
better.
 [The more liquidity accumulates above a significant price level, the more likely that
liquidity will be collected]

Draw on Liquidity (DOL)

How to identify the draw on liquidity ?

As a day trader, the DOL can be PWH/PWL (Previous Week High/Low) , PDH/L
(Previous Day High/Low) , or session High/Low from Asia, London, or New York paired
with EQH/EQL (Equal Highs/Lows) with a Low Resistance Liquidity Run (LRLR)
condition. EQH/EQL (Equal Highs/Lows) are large pools of liquidity so institutions will
always draw towards those levels to take out retail.

How do I find the next Draw On Liquidity?

First thing, price is always either rebalancing or taking liquidity.

Next, price is going from P/D array to P/D array. Hence, you must annotate your P/D
zones to know if price rebalanced or will rebalance, you must also annotate your
liquidities and P/D arrays.

To find the next Draw On Liquidity, you can follow a displacement, use the reaction on a
P/D array.

Internal range liquidity: Understanding internal range liquidity is important for

Here are some ways to find internal liquidity:

- Fair value gaps: These are gaps between the fair value of an asset and its
current price. Traders can look for fair value gaps to determine where the
market is likely to draw to or reach for.
- Order blocks: These are areas where large orders were executed, creating a
block of orders. Traders can look for order blocks to determine where the
market is likely to draw to or reach for.
- Volume imbalance: is a term used in trading to describe a range between
where one candle's body and another candle's body doesn't touch but there
are wicks that overlap in between. It can be a difference between a lower close
with a higher opening or a volume imbalance between a higher close and a
lower opening. Volume imbalances can be traded through multiple times, but
if you know your bias and where it's likely to draw to at a later time, you can
come right back up and go back to respecting the very specific levels, which is
the low, the consequent encroachment midpoint, and the high of the volume
imbalance.
- Gaps in price: These are areas where the price of an asset has a sudden
jump or drop, creating a gap in the price chart. Traders can look for gaps in
price to determine where the market is likely to draw to or reach for.