Liquidity and Ranges Lecture Notes

Overview of Liquidity Types

• Equal Lows (Bottoms): Key liquidity points at market bottoms.
• Equal Highs (Double Tops): Key liquidity points at market tops.
• Trend Line Liquidity: Retail trend lines; liquidity based on common tools like Fibonacci and EMA.
• Highs and Lows Liquidity: Every high and low in market structure contains liquidity.
• Support and Resistance Liquidity (SNR): Breakouts above resistance or below support; breakout traders often return for retests.

Advanced Liquidity Types

• External Liquidity: High and low of a range (end points).
• Internal Liquidity: Everything within the range.
• Inducement: A tactic where traders are misled into taking positions (traps).
  • Example: Break of a high followed by bullish confirmation luring traders into long positions only for the price to drop.

Inducement Explained

• Inducement is seen as a trap for retail traders.
• Smart money does not consider it a trap if one understands the underlying structure and liquidity.
• Key Signs of Inducement:
  • Break of structure where retail traders typically place stops (e.g., below lows).
  • Price movement that seems to validate retail setups before reversing.

Understanding Ranges

• Strong Low: A valid strong low occurs when liquidity is taken and structure is broken.
• Strong High: A valid strong high occurs similarly.
• Ranges are confirmed with clear bullish/bearish structure between two points (A to B).

Liquidity Cycle in Ranges

1. Internal Liquidity: The market targets internal liquidity after taking out external liquidity.
2. External Liquidity: The next target after internal liquidity is reached.
3. Cycle of Price Action: Price action often consists of taking internal liquidity first, followed by external liquidity, and vice versa.

Key Concepts in Liquidity and Ranges

• Weak High and Weak Low: Created automatically when strong highs and lows are established; these serve as targets for traders.
• Obstacle: A weak high or low that may provide a reaction point but does not guarantee continuation.
• Fractals: Ranges can exist inside other ranges (e.g., a 15-minute range within a 1-hour range).

Trading Strategies

• Focus on taking partial profits at safe targets (e.g., internal liquidity) based on the market’s fractal nature.
• Use liquidity points to establish entry and exit strategies, avoiding traps set by inducement.
• Understand the difference between internal liquidity (current range) and external liquidity (broader market context).

Conclusion

• The lecture covered the importance of liquidity, the types of liquidity, and their impact on trading strategies.
• Understanding liquidity helps identify potential traps and better predict market movements.
• Emphasis on observing market structure and utilizing fractal analysis for effective trading.