Liquidity refers to the ability to quickly buy or sell an asset in the market without significantly affecting its price.
It is important in trading as it relates to how quickly assets can be traded and at what price.
Importance of Liquidity in Price Action
Price action traders focus on identifying reference points where liquidity is likely to reside.
High probability areas of liquidity include buy and sell orders at specific market points.
ICT Concepts on Liquidity
Swing Market Dynamics: When the market swings lower, short positions become profitable. If the market swings back, open profits might erode, leading to losses.
Short Positions: Bearish traders place stop-loss orders above swing highs.
Buy and Sell Liquidity: The market often gravitates towards areas where liquidity is concentrated (e.g., old highs/lows).
High and Low Resistance Liquidity Runs
High Resistance Liquidity Run: The market faces significant resistance when moving towards old highs due to previous peaks and troughs.
Low Resistance Liquidity Run: Easier market moves through price action with minimal resistance, often following a sharp directional change.
Market Order Flow and Resistance
Institutional order flow is influenced by the desire to seek liquidity above highs and below lows.
High resistance runs encounter multiple levels of resistance, making it challenging to break old highs or lows without significant market events (e.g., FOMC announcements).
Trading Strategies with Liquidity Profiles
Traders should avoid entering trades during high resistance liquidity runs due to the multiple resistance levels.
Focus on low resistance liquidity runs where there is clear market direction with minimal retracement and resistance.
Identifying Opportunities
Look for price action that shows a willingness to break through old lows or highs, indicating low resistance.
Recognize when price moves smoothly through these levels, suggesting an easier environment for liquidity runs.
Institutional Price Models
Market makers often trade based on where institutional orders are expected to be, such as above old highs or below old lows.
Understanding these concepts can align trading strategies with institutional order flow for more effective trading.
Conclusion
Combining knowledge of liquidity, price action, and market structure enables traders to identify high-probability trading opportunities.
Practicing these strategies can lead to better alignment with market movements and improved trading outcomes.