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.
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' 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.
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.
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 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.
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.
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.
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.
In trading, liquidity refers to the ease with which assets can be bought or sold in the market without affecting the asset's price. High liquidity indicates a large number of buyers and sellers, which means you can execute trades at your desired price. Liquidity influences the market by affecting price stability; in a highly liquid market, prices change more smoothly, while in a less liquid market, prices may jump sharply.
'Inducement' in trading is a strategy employed by larger market participants to trick other traders into entering the market prematurely. By manipulating price movements, these market makers induce traders to make trades that may not be in their best interest. When the inducement occurs, traders' stop-loss orders are hit, causing them to exit their positions prematurely and often at a loss.
A 'stop hunt' in forex trading is a market phenomenon orchestrated by large traders or institutions. They manipulate the market price to move against the positions of smaller traders, specifically aiming to hit their stop-loss orders. This manipulation forces the smaller traders to exit their positions, often resulting in losses. Stop hunts are often observed during periods of low market activity, such as before major news announcements or during the Asian trading session when major markets are closed.
Yes, Sonarlab has several indicators that helps plotting out liquidity. Our SMC Indicator has: buyside and sellside liquidity, trend line liquidity, equal highs and lows, Inducement plotter and much more. We also offer a wide range of free tools that helps you with finding liquidity. Make sure to create an account on Sonarlab to gain access to the free scripts.