Market liquidity is an overlooked topic when it comes to trading. The definition of liquidity is; “the availability of liquid assets to a market or company”. In the simplest way possible, Liquidity is a measure of the ease of ability to enter and exit a market at the desired price based on the number of buyers (bids) and sellers (asks/offers) in that market.

Taking liquidity within your trading plan is a big probability gainer. How often did you got that you your bias was on point, but you got stopped out by a wick? Also know as: stop hunt or liquidity grab. This happens systematically - over and over again. are the main reason as to why common retail trading methods such as trend lines and chart patterns (double tops/bottoms, head and shoulders, flags, wedges etc..) rarely work. If 95% of retail traders are utilizing these methods, then of course institutional algorithms will be programmed to purge stop losses surrounding these chart formations.

So when trading SMC we look at the market from a different perspective. We are not trading like the big institutions, but we simply follow them. If we know that for every buyer we need a seller, liquidity serves as fuel for the market maker. If there is liquidity forming before a POI, this will tell us that there is a point where price can heavily react from.

Liquidity Terms

A variety of liquidity types exist in trading, and the techniques to plot them can differ, depending largely on the trader's strategy. These liquidity types often have distinct reactions in the market, which can be identified and labeled. For instance, a liquidity grab - a sudden spike in buying or selling activity - could occur above a trend line or at an equal high. It's important to understand these reactions as they provide insights into market behavior around these liquidity zones. This understanding, in turn, can influence the effectiveness of your trading strategy.

Inducement

'Inducement' is a word we hear more in trading. It's like a trick that makes traders jump into the market too early. When this trick happens, the traders' safety nets (stops) get hit, and the price moves the way it was supposed to. The big players in the market, called market makers, use this trick to make other traders make mistakes. Market makers like to trade where it's easiest for them. This inducement trick makes traders mess up and be on the losing side before the market makers make their big moves.

Stophunt

In forex trading, a 'stop hunt' is when large traders, like market makers or institutions, force the market price to shift against smaller traders. They do this to hit the smaller traders' stop loss orders and make them exit their positions at a loss.

Stop loss orders are a safety net used by traders. If the currency price falls to a certain level, the stop loss order automatically ends the trade to limit the loss.

Big traders with lots of money can manipulate the market. They push the currency price to where most stop loss orders are, triggering a selling rush that lowers the price even more. They then buy at this lower price and profit when the price goes up again.

Stop hunts often happen when there's low market activity. This makes it easier for big traders to manipulate the price. For instance, they often occur before news announcements or when major markets are closed during the Asian trading session.

Buy- and sellside liquidity

Buyside liquidity refers to areas on a chart where short sellers, or those betting on price declines, place their stop orders. Conversely, sellside liquidity denotes areas where traders expecting price increases, or long-biased traders, set their stops.

These zones frequently function as support (price floor) or resistance (price ceiling) levels, offering potential trading prospects when prices approach these points.

Different types of liquidity

Different types of liquidity exist, and the methods for plotting them can vary based on the trading style. Whether it's Fibonacci levels, order blocks, or any other trading concept, you can choose to incorporate them into your plan or not. It's crucial to understand that various liquidity concepts can be traded. Let's proceed to illustrate these for you.

1. Range/ swing Liquidity Levels

Each high and low in the market conceals resting liquidity - orders in waiting. Traders often place their stop loss or targets above or below these highs and lows, forming a reservoir of liquidity. As mentioned earlier, every transaction requires a buyer for every seller, and vice versa. Therefore, to propel a move, the market tends to breach these highs and lows. This dynamic is why market structure doesn't always adhere to a flawless pattern. You can check out our free indicator in our dashboard, so make sure to sign up for your free account to gain access.

2. Trend Line Liquidity

Trend line liquidity shares a similar concept. Put simply, liquidity resides behind any noticeable level. Trend lines represent a neat alignment of highs or lows, fashioned into a line. There are multiple highs that need to be surpassed. The more clear-cut the trend line, the larger the liquidity pool.

3. Equal Highs and Lows

The term 'equal highs and lows' is self-explanatory. It refers to a clearly defined support or resistance boundary that traders anticipate will be respected. However, it often happens that this expectation is disrupted, and the level is eventually breached. In this example below you will see the SMC Indicator plot out EQH followed up by a stop hunt which is a sign of liquidity grab. The EQH served as a liquidity grab.