Overview
This lecture explains the concept of time-based liquidity in trading, emphasizing the importance of a structured, rule-based approach over reactive, impulsive decisions for better trade outcomes.
The Problem with Reactive Trading
- Reacting to price movements without a predetermined plan leads to subjective, emotional decisions.
- There is no statistical edge in acting based on feelings when price hits certain liquidity pools.
- Impulsive trading often results from focusing on insignificant price levels, like minute chart highs and lows.
Benefits of a Structured Approach
- Predetermined actions and price levels provide a mechanical, less emotional trading strategy.
- Using major time-based liquidity pools increases the probability of meaningful price reactions.
- Rule-based trading reduces impulsiveness and fear, leading to more consistent results.
Key Time-Based Liquidity Pools
- Focus on monthly, weekly, daily, and session highs and lows to identify significant liquidity pools.
- Session levels refer to New York, Asia, and London trading sessions.
- These higher time frame levels attract significant price movements and offer larger magnitude trades.
How to Use Time-Based Liquidity Pools
- Target trades toward or away from these significant levels, depending on proximity.
- Avoid trading off minor liquidity pools, especially on very short timeframes.
- Combine predetermined price levels with specific time windows (e.g., 8:30–11:00 AM, 1:30–4:00 PM).
- Adjust for higher timeframe bias; if the market trend contradicts the level, reconsider trade direction.
- Backtesting and tracking results help refine the approach and increase effectiveness.
Key Terms & Definitions
- Liquidity Pool — A price level where a large cluster of pending buy or sell orders exists.
- Time-Based Liquidity Pool — A significant high or low formed on monthly, weekly, daily, or key session timeframes.
- Predetermined Actions — Trade decisions planned in advance for specific price levels and times.
- Higher Time Frame — Longer time intervals (like daily or weekly charts) that show broader market trends.
Action Items / Next Steps
- Stop using insignificant, short-term price levels for trades.
- Identify key monthly, weekly, daily, and session highs/lows as main liquidity pools.
- Define in advance which price levels and times you will trade.
- Backtest your trades on these levels and track performance data.
- Refine your strategy using feedback from your collected data.