Understanding Liquidity in Market Trading

What is Liquidity?

• Definition: The degree to which a market or asset can be quickly bought or sold without drastically affecting its price.
• Price Action: Time frame is irrelevant; focus is on identifying key reference points where liquidity is likely high.

ICT Concepts of Liquidity

• Buy Orders and Sell Orders: Relates to identifying points of high probability liquidity in the market.
• Short Positions and Profits: When the market trades lower, short positions become profitable.
• Stop-Loss Orders: Usually resting right above a high for short sellers, and similarly for buyers when the market rallies and retracement occurs.

Key Principles of Liquidity

• Above Old Highs and Below Old Lows: High probability points for liquidity to rest.
• Market Tendencies: Market seeks out liquidity by moving slightly above highs (buy stops) or below lows (sell stops).

Price Action Analysis

• Focus: Not on specific patterns but where existing orders reside.
• Targeting Areas: Where markets have previously shown willingness to go higher or lower.
• Smart Money Perspective: Buy stop liquidity above swing highs, sell liquidity below lows.

High Resistance Liquidity Runs

• Resistance Levels: Encountered from old lows and highs when seeking liquidity.
• Layers of Resistance: These make it difficult for price to reach old highs or lows.
• Economic Events: Significant events like FOMC or non-farm payroll data can cut through these resistant layers.

Trading Strategy

• Low Resistance Liquidity Runs: Easier areas to trade as they have less resistance. Example: one-sided price action with minimal retracements.
• High Resistance Liquidity Runs: Avoid trading this due to many layers of resistance. These are more unlikely without significant economic events.

Bullish and Bearish Scenarios

• Bearish: Market trends down with rallies facing high resistance liquidity.
• Bullish: Market trends up with retracements being defended and liquidity above highs easier to reach.

Practical Examples

• Price Action Diagrams: Conceptual understanding with elementary diagrams.
• Market Structure Removal: Removes indicator-based trading, focuses purely on price movement.

Conclusion

• Low Resistance Areas: Best areas for trading, the least resistance provides more straightforward trading opportunities.
• High Resistance Areas: Usually avoided unless significant market-driving events occur.
• Institutional Order Flow: Understanding it helps trade with minimal resistance and drawdowns.

Overall, liquidity understanding in market trading revolves around identifying potential areas of high buy and sell orders, recognizing market tendencies, and strategically choosing low resistance liquidity runs for more effective trading.