Trade School Episode 3: Understanding Market Movements and Liquidity

Introduction

• Episode three builds on previous discussions about liquidity.
• Focuses on understanding why the market moves and how to frame trade ideas.

Key Concepts

• Draw on Liquidity
  • Understanding where the market is likely to move.
• Four Reasons Why Markets Move
  1. To hunt liquidity (targeting highs and lows).
  2. To rebalance fair value gaps (inefficiencies).
  3. To rebalance equilibrium.
  4. To generate liquidity.

Fair Value Gaps (FVG)

• Definition: A three-candle formation that indicates a gap.
• Purpose: Markets move to rebalance inefficiencies.
• Types:
  • Bullish FVG: Indicates upward movement; acts as support.
  • Bearish FVG: Indicates downward movement; acts as resistance.

Understanding Draw on Liquidity

• Concept: Market is drawn to liquidity areas like a magnet.
• Chart Analysis:
  • Buy side and sell side liquidity marked on charts.
  • Example: Market takes sell side and moves back to buy side liquidity.

Example Analysis

• Daily Time Frame
  • Look for bullish or bearish FVGs.
  • Assess whether the market respects or breaks these gaps.
• Trade Framing
  • Use FVGs to confirm bias and anticipate market direction.

Advanced Concepts

• Generated Liquidity: Created during market movements, targeted eventually.
• Bias Formation
  • After sell side liquidity is taken, expect movement to buy side if bullish.
  • New data changes bias; observe market for further cues.

Practical Application

• Charting Practice:
  • Identify FVGs and liquidity draws on charts.
  • Use backtesting on paper trade accounts to build confidence.

Conclusion

• Understanding draw liquidity helps in predicting market direction.
• Align trade decisions with perceived market draw.
• Next steps: Dive deeper into trading models and entry strategies.

Call to Action

• Practice chart analysis to identify draw on liquidity.
• Prepare for upcoming videos focusing on trading models and strategies.