✴️ Market Liquidity No matter how long you have been trading, at some point you must have questioned the depth in the market you are trading. In other words, its liquidity. Liquidity is the #1 element that makes a market work and competitive. For a market to be rich in liquidity, there must be broad participation from both buyers and sellers. That’s why it makes sense for smart money or market makers to extract liquidity from the market. Liquidity hunting is a very common practice. It is nothing but the art of forcing losing players out of the market who are known to be weak long and short holders. ✴️ Liquidity Grab Often Occurs Against The Underlying Trend The bigger and brighter the liquidity zone, the more likely it is that Smart Money will target that particular zone, especially if it is located against the underlying trend. For example, in a bearish trend structure, you can often see clear liquidity picking up from below, against the trend, and reversing the price up. This is more common in very liquid markets with high trading volume (e.g. Forex, stock market). Why does it happen? Big players know that most of us use various indicators, moving averages, candlestick and chart patterns and other popular tools for our day trading, scalper trading. The big players can easily lure retail traders to enter the market at bad points and act against their positions. Many traders use significant levels to place stop losses and buy or sell stops for exits and entries respectively. It is these price levels that are used by smart money to provide their needs with the right liquidity. Institutional players cannot trade the same way as retail traders because in low liquidity price zones, they can up/down too much on large orders. So, they use high liquidity zones to place their own large orders in the market without having too much impact on the price. Liquidity grab is actively used mainly in the forex and cryptocurrency markets, as these markets are quite volatile and attract inexperienced traders. Besides, it is easy to use margin trading on them. Inexperienced (and even experienced) traders don’t know, and those who do, don’t believe that a market maker uses their stops to “make a market” on a regular basis. ✴️ More is Better The more liquidity that accumulates above a significant price level, the more likely that liquidity will be harvested. Where price consistently bounces off a demand (support) or resistance (supply) level several times, there is a huge concentration of stops by some players and orders in the other direction by others. It is important to focus on finding these spots, as you can find great entries after liquidity is collected. The more bounces, the better. The key factor for a major player is time. The more time passes, the more liquidity there will be. And if price cannot break through areas with multiple highs or lows, it is likely that liquidity around those price levels will increase over time. The more time that passes, the more liquidity will increase (unless major highs/lows are broken). Because of this factor, if you want to trade a liquidity seeking pattern, you should be aware of how time plays a role in consolidating orders above/below key liquidity zones. ✴️ Grabing Liquidity And Finding Stop Losses A liquidity grab is a liquidation event in which buyers’ or sellers’ stop losses are removed and traders who took a trade on a breakout are trapped. ✴️ Stop Loss Grab By A Major Player Stop loss finding and liquidity grab are similar concepts. Finding a stop loss is when price drops or rises behind the structural elements of the chart, or just goes to a round value. The smart money knows there aren’t many stops and liquidity accordingly, but as the saying goes, “one grain at a time, one seed at a time.” Seizure of liquidity is a bigger deal. These places are visible to almost all traders, everyone sees some “cool” level, where the price hits the same place a hundred times. A big player realizes that half of the players will play on the rebound, putting their stops behind the zone, while the other half will play on the breakout, jumping in after the breakout of this zone. As long as stop losses of the former and pending (buy/sell stops) or market orders of the latter are triggered, smart money will absorb all these orders. ✴️ Look For A Quick Price Reversal After A Breakdown The goal of the Smart Money trading system is very simple – retail traders, should avoid falling into the trap of the market maker and just follow the market maker. A liquidity grab should always be accompanied by a quick, strong reversal move after reaching a critical low/maximum – essentially a quick turn in price back to structural support or resistance. How quickly the price turns back we won’t know, but the amount of time it stays outside the supply or demand zone will depend on the liquidity of the market itself and the volume of recruitment by the biggies. ✴️ Monitor The Lowest Low And The Highest High Of The Structure When you do not see areas with the same lows or highs on the chart (consolidation), the main area to monitor is the lowest minimum or the highest maximum of the structure, i.e. where the highs or lows are connected by the trend line. ✴️ Maximum And Minimum Of The Market Structure Most traders’ stop losses will be located exactly where the high or low of the trend is visible. When the price falls below/below the start of the move, then stops will be triggered and new orders will be opened in the hope that the trend has finally changed. Liquidity will also be under other lows, traders will also jump in there to update the nearby structure, but the very beginning of the move will be the key level. This can be attributed to the time frame, i.e. timeframe, or simply fractality. There is a difference between targeted and non-targeted liquidity, i.e. caused by a market maker or caused by general market action. On the left side we have targeted and on the right side we have untargeted. The difference between the two is that the targeted liquidity grab is initiated by smart money and the non-targeted one by general market action. In the former case the targeted attempt to take out stops will start from the middle of the previous move where there are not many stops and liquidity, in the latter case there is a move under general market action.
LIQUIDITY GRAB IN TRADING For FX:EURUSD By DeGRAM – WorldNewsEra
