Liquidity

Liquidity is everywhere, ranges, double tops/ bottoms, trendlines, above highs and lows. The question is..  how can we use it to our trading advantage? This episode covers a mixture of drawn and chart examples so that you can become a master of understanding true market liquidity to trade on the right side of the market. ‘In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold.’ In trading we can use liquidity and an understanding of liquidity to greatly benefit our trading. We can use our understanding of liquidity to avoid trading setups that could result in -1% losses. We can use liquidity to highlight areas where the market needs to pull back to. Therefore identifying areas where trends can change. The market often has to pull back into these areas to gather the required liquidity so that ‘an individual or firm can quickly purchase or sell an asset’. You have to remember within trading we are not placing trades against robots or a machine, like a video game.  Trading is a zero sum game meaning that if you are within a winning position someone else on the equal and opposite side to the trade is losing. There always has to be a buyer for what you are selling in order for the market to remain liquid and vice versa. We can use liquidity to understand where to place entries and stop losses, greatly enhancing our accuracy on the charts. The key thing we need to understand is that we are all retail traders within this market. We simply do not have the capital to significantly move the markets or cause huge shifts that will affect price. We are passengers within the markets often piggybacking off of the larger banks and institutions who try to push price in their intended direction. Having said that, by understanding liquidity we can often remove the noise from the market to hone in on the most probable areas to see the market react therefore ‘trading with the big boys’. So how do we do this? Liquidity is everywhere and it can often become hard to distinguish the areas to see the market react. If you are often struggling to find the most probable point of market reversal there is one easy rule of thumb. Where the average trader will be placing their stop loss will often be where the market will reverse. Ok so if we know this how can we use it to our advantage? Let’s take a look.   https://www.tradingview.com/x/wVY172RO/ This screenshot is a great example of how liquidity works. There are multiple setups here that would fit the most common methodologies and strategies within the financial markets. Within every setup, the market has plunged liquidity once price has moved into an area of interest. I highlighted on the patterns video within stage 2, that patterns can be used to hone in on our area of interest within the market.  We can then use our understanding of institutional market movement to avoid taking unnecessary losses within these AOIs and get on the RIGHT SIDE OF THE MARKET.  There are multiple examples of these liquidity plunges happening with patterns within this screenshot.