Liquidity - Building Blocks of ICT

Summary

This video explains the concept of liquidity in financial markets, emphasizing its role in enabling seamless buying and selling without significant price changes. It explores how market makers and large institutions provide liquidity, manage price movements, and control market direction by drawing prices toward areas with high retail stop losses. The script further explains internal and external liquidity, identifying where market orders are likely to rest, and how smart money manipulates price to capture these orders. It also offers insights into technical analysis techniques used by big funds to spot liquidity and adjust positions for profit.

Takeaways

• 😀 Liquidity refers to the ability to buy or sell assets in a market without significantly affecting their prices.
• 😀 Market makers and large hedge funds are the primary liquidity providers, buying and selling the other side of trades.
• 😀 Liquidity is essential for price movement as market makers control price direction and ensure market orderliness.
• 😀 When retail traders drive prices higher, smart money (market makers) sells into the buying pressure and gets net short.
• 😀 Smart money manipulates price movement towards liquidity zones, like stop losses and breakout orders, to offload positions.
• 😀 Internal liquidity refers to stop losses and orders within a trading range, while external liquidity refers to those outside the range.
• 😀 Market makers will often target areas with relative equal highs (internal liquidity) to take out retail traders' positions.
• 😀 After taking out internal liquidity, the market maker moves to external liquidity areas to continue price movement.
• 😀 Fair value gaps and consolidation areas are key targets for price action, as smart money uses these to enter and exit trades.
• 😀 The process of moving to liquidity is predictable: price draws towards areas where retail traders' stop losses and orders are concentrated.
• 😀 Understanding liquidity helps traders anticipate market movements by recognizing where smart money is likely to move prices.

Q & A

What is liquidity in the context of financial markets?

Liquidity refers to the ability to quickly buy or sell assets in a financial market without causing significant price changes. In a liquid market, you can enter or exit a trade at any time, with minimal price impact.

Who are considered liquidity providers in the market?

Liquidity providers are typically market makers and large institutional players like hedge funds. These entities facilitate smooth market operations by buying the other side of retail traders' buy orders and selling the other side of their sell orders.

Why is liquidity important to market makers?

Liquidity is crucial for market makers because it enables them to maintain an orderly market. They use liquidity to enter or exit positions without causing sharp price movements. By ensuring liquidity, they can also manipulate prices to maintain fair value.

How do market makers control price movements?

Market makers control price movements by buying or selling at strategic points in the market. They ensure prices reflect fair value and move them in a way that supports their positions, either by pushing prices higher or lower to fulfill their trading objectives.

What happens when retail traders buy aggressively in the market?

When retail traders buy aggressively, market makers sell to them, taking on short positions. As a result, the market may temporarily move higher, but once market makers are in a net short position, they reverse the price movement to capture liquidity and offload their positions.

What is the role of stop losses and breakout orders in liquidity hunting?

Market makers hunt for stop losses and breakout orders because retail traders typically place them at key technical levels like equal highs or lows. These orders provide liquidity that market makers use to offload their positions while ensuring the market remains orderly.

What are the differences between internal and external liquidity?

Internal liquidity refers to the liquidity resting within a trading range, such as stop losses near highs or lows. External liquidity, on the other hand, refers to liquidity outside of the current range, often at more extreme price levels that are targeted later by market makers.

How do market makers identify liquidity on a chart?

Market makers identify liquidity by spotting areas where retail traders are likely to place their stop losses or breakout orders, such as equal highs or lows. These areas often correspond to support or resistance levels that attract large amounts of orders.

What is the significance of fair value gaps in liquidity analysis?

Fair value gaps are price areas where liquidity is typically absent or inefficiently filled. Market makers often target these gaps, either to offload positions or to ensure price movement toward areas where liquidity is resting, thus maintaining a fair and orderly market.

Why do market makers not simply market buy or market sell to offload their positions?

Market makers cannot simply market buy or sell due to the large size of their positions. Instead, they manipulate the price to target areas where retail traders have orders resting, such as stop losses or breakout levels. This allows them to offload their positions more efficiently.