Understanding The Concept Of Liquidity
What Is Liquidity in Trading? Liquidity is one of the major concepts of trading. Although most of the beginner traders often struggles with this liquidity concept. Meanwhile today in this blog, i’m gonna tell you what is liquidity, types of liquidity and how to identify it and trade it. Liquidity in trading states that where sell and buy orders are placed at certain levels it. In layman terms liquidity is where big institutions place their orders. There are 2 major types liquidity in trading sell side liquidity and buy side liquidity which is abbreviated as ssl and bsl.
Sell Side Liquidity
Sell side liquidity (ssl) is often present at below the support or you can say last low. I’ll try to make you understand with example here. Let’s say you are a beginner trader, now you can see the price falling. Meanwhile your strategy says the below this level the price may shift the momentum to the selling side and by believing in your analysis, you placed your sell order below the support. Now the market goes below the support and activate the buy and sell order and move in bullish direction, so now you became the liquidity.
Buy Side Liquidity
Buy side liquidity is the pool area of where most of buy orders and sellers place their stop losses above the resistance or equal highs. Here the price knows where most of the orders are placed. Meanwhile the price reaches to the level triggers orders and hunt the stop losses the continue to move in the past direction, sometime it is also known as the fake breakout.
Why Does The Market Hunt Stop Losses?
Whenever the market hunt stop losses, every retailers or beginner trader thinks why market always hunt my stop loss. Meanwhile the truth is market doesn’t even know that you exist and the market doesn’t care about your funds. However, with the funds we trade is just like drop in the ocean, now think for a seconds will you even care for a drop when you can see the ocean. That’s how market works, the market only see big players and big amount of capital. So back to the topic sl hunting refers to liquidity grab or sweep in professional trading terms and sl hunting in layman terms.
What Is Liquidity Sweep & Grab
This liquidity terms includes two major points liquidity sweep and grab. Now the question raises what is liquidity sweep and grab, how to spot this and trade. Let’s understand one by one
- Liquidity Grab: Liquidity grab terms stated that a sudden spike or wick towards the upside and downside. In order to execute the orders and hunt the stop loss and may continue for the trend continuation. It includes short term manipulation, immediate reversal expected and it shows the aggressive quick move just to hunt sl and trap the retailers.
- Liquidity Sweep: Liquidity sweeps shows the broader intent of the market and the behaviour of the price. Meanwhile it doesn’t includes quick or aggressive spike. However it includes structured price movement, no immediate reversal and multiple candle closing above the high or below the support.
Common Mistakes Traders Make Around Liquidity
- The very first common mistakes what retail traders does is they don’t wait for price to grab or sweep the enough liquidity to trade in your favor.
- Another mistake they do is, they don’t place the sl keeping the liquidity in the mind. As a result they got stopped out from the trade
- They are entering in fomo, making random entries, trade without stop loss.
- Placing the sl at the but obvious place like above the high, below the low.
In case you don’t how to identify the liquidity, you can check my previous post of how to spot liquidity in the charts.
How Trader Use Liquidity In Their Analysis
Experienced traders use liquidity to refine their entries, plan their trade and make analysis according to the same. Most of time price collects liquidity in form stop losses and activate the buy and selling order. According to my experience if you want your entries and your trade ends up in green color, then you should always wait for the price to grab the liquidity and if you have entered early in the trade then give your trade enough space to grab the liquidity which means place your stop loss a little deep.
Conclusion
The market doesn’t move randomly, it runs with the liquidity and look for the liquidity. Liquidity is the fuel which market uses to move in any direction. Liquidity is one of the most important concept in the trading. Once you understand the liquidity concept, your trade may get better results and your analysis will get improved.
If you want to make your analysis better, you can check out my previous post How I Analyze The Market.