Liquidity Concepts in Trading Strategies

Oct 13, 2024

ICT Mentorship December 2016 - Module 2: Liquidity Concepts and Price Delivery

Key Topics

  • External Range Liquidity
  • Internal Range Liquidity
  • Gap Risk and Order Blocks
  • Market Maker Models
  • Frameworks for Trading

External Range Liquidity

  • Definition: Identified by buy-side liquidity above the range high and sell-side liquidity below the range low.
  • Liquidity Runs: Seek to match orders with pending liquidity located in liquidity pools.
  • Resistance Levels:
    • Low Resistance: Favorable for trades, minimal resistance to profitability.
    • High Resistance: Unfavorable, presents obstacles to profitability.

Internal Range Liquidity

  • Definition: Occurs when the trading range is stable, leading to the filling of liquidity voids and fair value gaps.
  • Gap Risk: Market quickly adjusts to levels with minimal prior trading, creating opportunities and risks associated with these gaps.
  • Price Movement: Retracements often target logical pullback points within the range.

Concepts and Practical Application

  • Order Blocks: Areas within trading ranges where new buy/sell orders are placed.
  • Market Maker Models: Form within trading ranges to facilitate liquidity.
  • External vs. Internal Range Liquidity:
    • External: Occurs when price moves outside previously established ranges.
    • Internal: Occurs within the current range and focuses on closing or filling gaps.

Trading Strategy Framework

  • Analyzing Market Structures:
    • Use of old highs/lows and equilibrium points to assess market potential.
    • Retracements within ranges aim for significant pullback areas.
  • Using Candles for Entry Points:
    • Identify large candles or gaps to predict retracement zones.
    • Previous up/down candles serve as reference points for bounce or continuation.

Higher Time Frame Analysis

  • Charting Time Frames:
    • Monthly and weekly charts provide macro views; daily and hourly charts refine entries.
  • Liquidity Runs:
    • Focus on identifying low resistance runs, indicating liquidity-driven price targets.
  • Hierarchy of Analysis:
    • Determine major trends on monthly/weekly charts to align smaller time frame trades.

Trade Execution

  • Entry and Exit Strategies:
    • Enter within an internal liquidity range, aim to exit on external liquidity targets.
    • Use order blocks as entry points and liquidity zones as exit targets.
  • Liquidity Void and Gap Trading:
    • Utilize gaps and voids for entry opportunities, recognizing potential rapid price moves.

Practical Applications

  • Real Market Examples:
    • Analyzing historical price moves to identify similar upcoming opportunities.
    • Recognizing market conditions that favor low resistance liquidity runs.
  • Weekly Trading Plans:
    • Identify one strong trade setup per week maximizing low resistance liquidity conditions.
  • Market Maker Strategies:
    • Align trade strategies with likely market maker movements to capture price swings effectively.

Summary

  • Focus on Higher Time Frames:
    • Monthly and weekly charts guide directional bias, aligning trades with institutional flows.
  • Low Resistance Liquidity Runs:
    • Aim for trades with minimal resistance for higher probability of success.
  • Consistent Review of Market Structures:
    • Analyze past price actions to inform future trades, using liquidity concepts as a guiding framework.

Good luck and good trading!