Liquidity Flashcards
What is liquidity?
How should we think of liquidity in terms of how price reacts to it?
Liquidity is certain price points in which orders collect in the market and where an asset class is “liquid” - Liquidity is simply a collection of orders, sitting below lows and above highs.
Liquidity can be thought of as essentially a magnet for price. Price is attracted to it.
Bonus: This is because market makers want to push price so they can get their orders filled.
What do high liquidity areas even mean?
High liquidity areas can absorb large trades without significant price slippage. BFI’s initiate sweeps at the high liquidity areas to absorb as many resting orders as possible, so they can get in at a good price with minimum slippage.
What happens at these price points?
Lots of people enter and exit the market.
Explain liquidity in terms of orders
Liquidity is just a collection of orders sitting in the market, whether they’re limit orders, stop loss orders or a place where there is likely to be a concentration of market orders that will be executed when price interacts with certain levels of supply or demand in the market.
What would a BFI need in order to fill their big orders?
When a BFI (Bank or Financial institution) makes a move in the market, they need to have people going in the opposite direction as them in order to fill their own orders. Therefore a BFI would “seek areas of liquidity”
How can we use this concept to help us trade?
If we can understand where the liquidity is, be able to spot when theres a liquiditiy sweep and then spot confluences play out (like a BoS), we can then take a trade.
Why do banks seek liquidity?
Banks seek liquidity so they can move price in which ever direction they want. They use it to build and offload their positions.
Who uses liquidity and how is it used to fuel moves in the market?
How would a BFI or whale use their capital to manipulate the market?
What would happen if a BFI did not place their orders in areas of liquidity?
Highly liquid markets like the FX, indices, commodities, stock and crypto markets, are typically manipulated by large banks, institutions or whales that have the means to push the market around by absorbing buy or sell orders and proceeding to push the market around by flooding it with buy order to cause the price of an asset or equity to go up, or conversely flooding it wil sell orders to push it down.
A BFI lacks the necessary liquidity to get into meaningful position size without inadvertently pushing price away from their entry point, and consequently, getting a poor average fill on their position. This lack of liquidity results in orders not being filled at their desired price and thus slippage! That is why they need liquidity to make their moves.
Sometimes we see massive swings in price action for no apparent reason. Sometimes we see gaps in price when looking at a particular instrument, usually penny stocks or some cryptocurrencies. Why?
An absence of liquidity can cause price to move violently up or down (aka volatility)
What is structural liquidity?
This is a type of liquidity that “rests” above major pivots in price action, but only when that pivot or structure point is responsibly for breaking one of more levels of struture aka prominent highs and lows.
What is the logic behind “structural liquidity”?
The logic is that if there is a clear level in which price pivots from, there will be a build up of buyers stop losses sitting below a level of pivot demand, and sellers stop lossing sitting above a level of pivot supply.
2 ways a BFI can use structural liquidity? change.
Structural liquidity can be grabbed (or swept) and used as a liquidity trap to aid them in building or off-loading a position in the market.
Alternatively it can also be targeting and used by a BFI to fuel a move and help to push price in the direction they originally intended as to manipulate price in order to profit from a position they’ve built.
How can we use structural liquidity to set take profits?
If prominent highs and lows attract price, then we can use those areas to set our take profits - because this is where the market makers can exit their positions too, otherwise their orders wont be filled at their desired price and we would see slippage.
What is buy side liquidity?
This is considered any build up that sits above a range or high where sellers stop losses (buy orders) - becuase a stop loss for when you short is a buy order - and breakout traders orders (buy stop limits) are sitting, ready to run a fuel a momentary or sustained bullish movement in price.
This is considered liquidity to “target” or “fuel the move”.
What is sell side liquidity
This is considered any build up that sits below a range or low where buyers stop losses (sell orders) and breakout traders orders (sell stop limits) are sitting, ready to be run and fuel a momenentary and sustained bearish movement in price. This is also considered liquidity to “target” or fuel the move.
Bullish / bearish liquidity traps?
These can simply be identified in the market on the mid to higher time frames as a clear sweep of a structural or pivot point of supply or demand, that essentially tricked traders into both using the level that is swept as a POI, only to be swept out and see price move in the direction they predicted, and traders who expected the POI to fail and were trying to play a breakout from that level.
Liquidity traps use a swing point to entice traders to get into a position early, only to later get taken as liquidity by the BFI’s.
- People who expected the POI to fail and tried to play a breakout from that level get stopped out.
- People who shorted, will be “Swept out” and then price moves in the direction they predicted.
What is
“Liquidity as inducement”?
This is when you have a level of “supply” sitting below a nearby level of supply that gets swept as it taps into the one above before running bearish
Or you haev a level of demand sitting above another lvel or demand that gets tapped into below it before running bullish.
What is “Liquidity to target”?
In this case, we looking to see liquidity get run and continue in the direction its being run, not sweep and reverse.
The logic behind liqudity to target is that BFI’s have already built up a position and are now going to manipulate price to push it in the direction they intended so they can profit off of the position they’re in, before offloading it.
