Transcript for:
Understanding Liquidity in Trading Strategies

what is liquidity liquidity refers to the degree to which a market or asset or security can be quickly bought or sold in the market without affecting the assets price dramatically when we look at price it doesn't matter what time frame you're looking at time is irrelevant for right now the specifics about price action as it relates to liquidity we as price action traders we're looking specifically for reference points where we can hone in on where there is a high probability of liquidity resting in the marketplace now liquidity as it relates to ict concepts it relates to buy orders and sell orders it's as simple as that when we have a swing in the marketplace as we note here and the market trades lower our understanding is there is someone that went short here this position would be net positive or profitable as the market moves lower as the market turns around if those same positions were still held their open profits would be eroding and at some point at this point right here they would be at a losing position our understanding is if there's a short position or traders that are bearish on the marketplace if they have positioned a profitable trade here and moved lower their stop loss order would be resting right above this high or generally many times just rate at that high the market tends to find an interest in going back to where that large body of interest or what we call liquidity in the marketplace it would be by liquidities as the market finds these lows down here as the market rallies away we are our understanding is that there's going to be buyers that have positions that are net positive or profitable as it trades higher at some point when the market starts to trade back down lower back into the area in which the buy orders would have originated from their open profits would be eroding until eventually moving into this area here it would be at a net loss position so when we look at when we look at price the idea is we're not looking for specific patterns for the sake of patterns we're looking at where existing orders will reside so essentially what you do is you're targeting areas at which the market has already seen a willingness to go higher or lower in this case we see a swing high and the market moves lower we view that as a smart money trader or as a market maker perspective we know that there's going to be buy stop or buy liquidity above that high when we look at the lows when the market moves away from these lows we see that as cell liquidity identifying both of these positions on both sides of the marketplace we're going to teach a concept called open float while that's not going to be covered in this specific tutorial or this month of training it's important to understand that the beginning foundations to understanding liquidity as it relates to buying and selling in the marketplace our first fundamental understanding is is that there's going to be liquidity above old highs and below old lows when we understand that we can see that they will eventually target these same levels moving price just above the previous high knocking out the liquidity that would be resting just above those highs in the form of buy stops the low old lows the market will seek liquidity for the sell side or the cell stops taking those orders out understanding this premise when we view price action it removes all of the retail minded perspective but heavily leaning on indicator based ideas when we adopt these principles with study of price it gives us the most truest purest view of how price is we have no confidence or direct relationship to our directional bias on price relative to anything except for price itself if the market's moving from an old high we know that there's going to be liquidity resting above that old high if the market's moved from an old low we know there's going to be resting liquidity below those lows it's just that simple now there's another concept when we understand liquidity the market has a tendency to run out old highs and old lows but it has a very difficult time to do that when the market has conditions like this when the market moves higher okay generally we can see a move higher and then it moves lower here now in the context of this entire move lower there's a lot of peaks and troughs here a lot of peaks and troughs the idea is if this is an old high back here for this high to be ran out okay or to seek the liquidity resting above that old high if this is where the current market action is right now or current price at market price for it to get all the way up there it has to encounter a lot of resistance in the form of old lows and old highs so you have the old lows acting as standard resistance then you have the old highs acting as buy stop liquidity so even if the market's going to go up if the market's going to seek the liquidity above this high how do we know it's going to stop there it could go another level higher for these buy stops and it could reach for this level of buy stops and then maybe this buy stop level here in the direction to run all these buy stops it's got to go through a lot of resistance in the form of these old lows just to get back up to this old high when the market presents these opportunities and again this is not specific to any time frame it's universal but when we see the market give this this very thick area of resistance okay it's a lot of price action that the market has to trade through to get back to an old high of significance we view this as a high resistance liquidity run the market's going to have a very hard time getting through all these previous lows and previous highs just to run out the liquidity that will be resting above this old high when we trade we are not looking for these opportunities while there are opportunities to trade with this in mind in other later teachings it's important to understand that this is the least probable trading condition to look for longs because you have so many levels of resistance and old highs to encounter before you get back to the old significant high we understand that the market has been presenting lower lows and lower highs and somebody in this market is obviously would be being profitable those individuals with stops above this old high in the form of a fund they're actually very highly defended because of this type of price action so it's going to take a very sharp economic market release the data kind of like non-farm payroll or fomc that type of event will knock through all of these levels of resistance to run out that liquidity but generally without that type of influence or injection of volatility these old highs generally are well defended obviously the opposite can be said when we see the market make a low of some kind it could be a take a long time really to form this but the old low would obviously have sell stops below it or sell liquidity and as the market makes higher highs and higher lows if we're seeing price action right here we can't reasonably expect the market to just drop straight down and make a run on the sell stops below this low without encountering first all of these higher lows and higher highs as the market went higher so to get through each one of these highs okay there's going to be a lot of resistance to just run down out the stops that would be resting below this low again just like we just mentioned with the high resistance liquidity run for old highs the same is true here for high resistance liquidity runs on an old low it's going to be very difficult for price to reach down through all of this price action and the more time it's spent in this area again the more unlikely it is to make a market move all the way down to this old low despite the fact that there may be really high levels of liquidity resting below that whole low without the evidence of a significant market driver coming into play with like an fomc interest rate announcement or non-farm payroll or something that would be completely unexpected in the marketplace black swan event something like that that's generally the only type of thing you see that will cut through this type of price action to get to the sell side of the liquidity here so for shorts we avoid these types of occurrences there are opportunities that we'll learn with trading with this profile or this market condition for high resistance liquidity runs but for now we want to understand that this is the element of price action that we want to trade very less frequent in now obviously there's going to be times when the market really provides us an opportunistic time to take action in the market and trade with price action and have very little resistance in our trades and obviously that comes by way of trading in low resistance liquidity runs a low resistance liquidity run would be in the form of something similar to this now the east crude depictions while they are rather elementary in the way that they're being shown here the concept is very easy to see in price action as we'll look at when we get done looking at the actual crude diagrams i've shared here if we see the market come off the old high okay and it comes down rather quickly if there is a very sharp or one-way type direction very little retracements of any kind when we see this okay once that market breaks below an old low from that point at which it breaks the old low until it gets through a short term high in other words the market comes down makes a low here starts to trade off comes down makes a higher low once it starts running through if we get a market break through this short-term high this run here begins its climb back up into the range that's created by this low being broken so it's being defined by this level here all the way down to this high once it's broken this area of price action is deemed low resistance now every time that a new short-term high is formed before this low is retreated to or retested as resistance every time there's a new short-term high what's going to form above that short term high it's going to have by stop liquidity so buy side liquidity is going to be above these old highs if we get a buy signal after a retracement we know that there's going to be very little resistance for that move to go higher running out the buy stops just above these short-term highs as we get closer to coming up into hitting this load that's been violated here then we start encountering high resistance liquidity runs so the probabilities fall off precipitously once we get back to the area which the range is defined in terms of low resistance then it becomes a high resistance liquidity run to make any higher highs or run on higher highs it becomes a lot more resistance to do that because we move back into an area where the market has moved in a range this expansion okay that's the easiest part of trading when we can trade inside that range so every time we create another short term high in here if we get a buy signal that buy signal will have very little resistance to get through the old high that it retraced from and you continuously look for those until you fill in that break on this old low once it gets back to this old low over here the market goes into what is referred to as a high resistance liquidity run anything higher than this price point here becomes a high resistance liquidity run much like everything else i've always taught everything i teach one-sided obviously is easily communicated by using the reverse of it or just turning it upside down this is a sell side of the marketplace low resistance liquidity run we have a consolidation in here the market expands goes into expansion it breaks above a short-term high so at the moment the short-term high is broken here market structure is bullish and then we go into a real quick run-up the market will create a high start to break down and once the market starts trading below an old low the market will have a very easy time trading back down into the point which the short-term high was broken on the upside so all this one-way direction price action where all of it looks this one-sided for buys only very little retracements this is the easiest time to trade in the marketplace right in here it's defined by the short-term high that's broken on the upside here that's where you would begin your point which it's deemed a low resistance liquidity run so you're focusing primarily on selling short every retracement is going to find very little resistance going lower to run out the previous low there's going to be what resting below these lows sell stop liquidity so the market goes lower breaks below this short term low here expands has a small little retracement what's going to be forming below this short-term low bottom chasers folks that want to be long but we understand that the market has broken an old high here and had real quick sudden price action very little retracements so we have very little resistance on the downside getting back to that point at which market structure broke so between this point here and where the market breaks down this low here this is the easiest area to trade in price action because you have very little resistance allowing price to just cut through all that but you're waiting for a short term load form and every time a short term low forms there's going to be cell stop liquidity resting below those lows okay so let's take a look at more examples of a high resistance liquidity run and a low resistance liquidity run and what makes those uh two types of liquidity runs different we have an old high back here noted here and the market starts to move lower and we showed this example of price action here with this old high violating this old high here selling off these old lows being violated here and the market starts to rally up notice there was very little resistance in the marketplace where this high eventually traded lower taking out the liquidity resting below these lows here this run from this high taking out these lows is referred to as a low resistance liquidity run because we have a longer term high to the left of us and the market has shown a willingness to take out a low and then we came back above cleared out a stop above the high retraced had an unwillingness to go above this up candle here so institutional order flow as you'll learn more about throughout this entire mentorship moves back to bearish and expands to the downside expands down to the downside to run out these stops below these lows the market rallies up again and fails to get above this swing high this run higher is a high resistance liquidity run the fact that it's going to have very difficult time getting above this high is because we've already priced in a longer term high the intermediate term high and this high is going to have a very hard time struggling to get through this height it's going to have very difficult time getting through it so this rally up if we were buying long here we know that there's going to be a high probability that this is not going to be running out the high is going to be in intact it's going to be defended and the higher high over here will be defended so when price goes back up into this high this actually becomes a low resistance liquidity run to see price come all the way back down to take out this low here the fact that we keep this old high in place and every low that forms has very little resistance as each time it moves through it's like a hot knife through butter very little resistance down every time a low is formed price goes through those lows this equal lows here price trades through those this short term low here price trades through it these short term lows here price trades through it so the the bias is bearish so you want to be focusing primarily on a market rally to take out short term lows or intermediate term lows the difference between that is every rally is going to be viewed as a high resistance liquidity run it's going to have very difficult time getting above the previous highs sometimes it will happen but generally you're going to find that it's going to have a very difficult time doing that but because that's built into price action having a high resistance liquidity run here it turns into a low resistance liquidity run for you to see a move below the short-term lows every short-term low is an opportunity to seek liquidity or the market to expand down after a retracement up to take out the stops that rest below the marketplace at every old low every single blow that you see in price once we identify where the market is in terms of high resistance or low resistance liquidity we can find old lows to the left market respects it here comes back but then now we have a lot of liquidity resting below this low here and this low here and the market runs right through it small little retracement there's more liquidity below this low here so it's going to expand down through it we have old lows back here so the market's going to do what it's going to retrace a little bit and then do what expand down to take out those stops below this old lower here the same thing is seen when the market finds a low in the market the market creates a smaller consolidation makes it a long-term low rallies up retraces moves into consolidation rallies through again so now we have a lot of price action here so this old low is going to be well defended the fact that we have a retracement going lower each time every time the market retraces that's going to be in the form of a high resistance liquidity run it's going to find very stiff resistance with violating old lows the old lows are going to be actually defended and you're going to see buying coming in the marketplace your focus is going to be primarily on the highs every short-term high is going to have very easy runs through them that forms a low resistance liquidity run the resistance levels are going to be very weak the support or lows are going to be very strong because the market's going to be capitalizing only on the buy side just the reverse of what we saw over here on the sell side everything's going to be supporting bearish prices so every retracement higher sets up another price leg to go lower aiming for the lows to be violated we've changed the tide here and we made an old low so every time the market retraces lower that sets up new buying opportunities to take out the short-term highs or immune term highs above the marketplace because what's going to be resting above those highs buy stops and you want to be buying low and selling to willing buyers above the current market action and that's what the market makers do so every time the market trades down it's actually just a new low resistance liquidity run to make a run above an old high and it makes it very easy to find trades this way market trades down smaller retracement its old high will be easily ran out low resistance liquidity run market trades back and has a retracement very little resistance to get back up to this old high it runs cleanly through that another retracement here the liquid is going to be resting above this old high and eventually the market expands through it as well [Music] and eventually the market trades through those lows as well okay so there's many elements to the things i've thought in this month's teaching looking for clean highs where the levels are just too clean when the market shows those types of levels it's going to be very opportunistic for you to build the idea that there's going to be buy stops above that so any little retracement sets the tone for another drive through that and the market continues to find an ease of getting back through old highs at some point you're going to look at price action and it's going to be very crystal clear that the more price action there is around a specific level or a high or a low that is indicating a levels being defended on an institutional price model so you're going to see very easy trading when you trade away from that level and by doing that you're going to be getting yourself in sync with the institutional order flow then your trades will find very low resistance in the form of profitable exits and very little draw down