Overview
This lecture explains how to identify and use open float liquidity pools on the Canadian dollar daily chart, focusing on finding high-probability trading areas where large funds target buy and sell stops.
Identifying Liquidity Pools
- Liquidity pools are areas above old highs or below old lows targeted by large funds.
- Use higher time frames to identify where buy and sell stops from institutional traders are most likely located.
- Every quarter (about 3-4 months), markets often target these liquidity pools.
Open Float Concept
- Open float analyses the range between the highest high and lowest low over a 120-day window (60 days back, 60 days forward).
- For a specific date, look back 20, 40, and 60 trading days to identify past highs and lows.
- Project forward 20, 40, and 60 days to anticipate future liquidity pools.
- New high and low ranges form every 20 days, offering near-term trading opportunities.
Using Open Float in Trading
- Buy stops accumulate above recent highs; sell stops accumulate below recent lows.
- Monitor which side (buy or sell stops) gets repeatedly taken out to infer institutional order flow (bullish or bearish).
- A market consistently taking out buy stops indicates bullish institutional flow; vice versa for sell stops.
Example Application to USD/CAD
- Price action running above highs or below lows often signals stop runs and liquidity grabs by large funds.
- Patterns like false breaks (e.g., turtle soup) exploit these liquidity runs.
- Intraday and swing traders can use the 20, 40, 60 day intervals to bracket trading opportunities.
Evaluating Institutional Order Flow
- Continuous stop runs on one side suggest the market's directional intent.
- When markets hit new lows and sell stops repeatedly, expect further downside (bearish flow).
- When markets hit new highs and buy stops, expect upward trends (bullish flow).
- Significant changes (quarterly shifts) signal possible trend reversals.
Using Open Interest
- Declining open interest at support levels implies smart money accumulating for an upward move.
- High open interest with a price drop suggests heavy bank participation offering liquidity to buyers.
Key Terms & Definitions
- Liquidity Pool — Area where buy or sell stops accumulate, typically above highs or below lows.
- Open Float — The range between highest high and lowest low in a 120-day window (60 back, 60 forward).
- Institutional Order Flow — Directional market movement led by large funds.
- Open Interest — The total number of outstanding contracts; indicates market participation or exit.
Action Items / Next Steps
- Practice identifying 20, 40, and 60-day highs/lows and drawing open float ranges on daily charts.
- Monitor which liquidity pools (buy stops or sell stops) are being targeted.
- Prepare to use open float analysis for trade setups and trend confirmation in upcoming lessons.