Bootcamp Day 8: Understanding Liquidity in Trading

Introduction

• Topic: Liquidity in trading
• Importance: Largest and most important topic in the presented strategy
• Plan: Three-part series focusing on liquidity

Objectives

• Understand what liquidity is
• Learn why liquidity is important in the market
• Discussion focuses on liquidity's role in market movement (not spotting or trading off of liquidity)

What is Liquidity?

• Defined as "resting orders" in the market
• Types of Orders:
  • Stop orders: Remove traders from a trade
  • Limit orders: Buy or sell at specified prices (buy limit, sell limit)
• Function: When price targets are hit, orders are activated, causing market entries or exits
• Represents a pool of money at specific price points

Importance of Liquidity

• Liquidity is targeted for market movement
• Market Movers: Banks and institutions have large orders that influence the market
• Exchange Dynamics:
  • Buying/Selling shares (e.g., Apple)
  • Digital brokers and exchanges facilitate the process (previously manual)
  • Brokers may trade against traders (B-booking)

Banks and Market Movement

• Banks seek liquidity to fulfill massive orders
• They target liquidity to move markets in desired directions
• Understanding liquidity helps traders align with market movers

Trading Strategy

• Align with market direction by recognizing liquidity
• Identify liquidity sweeps and market structure shifts for trading signals
  • Market Structure Shift: Indicates change in market trend
• Importance of confirmation before executing trades
  • Avoiding premature trades (e.g., buying immediately at liquidity)

Conclusion

• Liquidity allows understanding of market direction
• Essential to know where liquidity lies in the market
• Part 2 will cover how to spot liquidity
• Part 3 will discuss execution and deeper understanding

Homework

• No specific assignments
• Recommendation: Review the concept of liquidity multiple times to solidify understanding

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Stay tuned for part two of the series where spotting liquidity will be discussed further.