Learning Objectives
- Understand liquidity.
- Identify buy-side and sell-side liquidity.
- Recognise liquidity sweeps.
- Improve entry timing.
Definition
Liquidity refers to areas where stop-loss orders and pending orders are concentrated. These areas provide the volume needed for large market participants to enter and exit positions.
Types of Liquidity
Buy-side Liquidity
Found above previous highs and equal highs where buy stop orders accumulate.
Sell-side Liquidity
Found below previous lows and equal lows where sell stop orders accumulate.
Why Liquidity Matters
Markets frequently move toward liquidity before continuing or reversing. Understanding where liquidity exists helps traders avoid entering trades just before stop hunts occur.
Common Mistakes
- Believing every breakout is genuine.
- Ignoring equal highs and equal lows.
- Trading directly into liquidity.
Key Takeaways
- Liquidity explains many market movements.
- Always identify liquidity before looking for entries.
- Liquidity should be combined with market structure.