What is Liquidity? - ICT Concepts

Summary

In this video, the concept of liquidity in trading is explained through practical examples. The presenter emphasizes how liquidity is linked to stop-loss orders, which are typically placed at obvious highs and lows on a chart. By identifying these key levels, traders can anticipate where stop orders are resting, creating targets for potential market movements. The video walks through various scenarios on different timeframes, including the five-minute and fifteen-minute charts, and shows how to spot buy and sell-side liquidity. It concludes with an example of using a mentorship setup to maximize trading opportunities.

Takeaways

• 😀 Liquidity refers to where traders place their stop-loss orders, often around the most obvious highs and lows in the market.
• 😀 Buy-side liquidity is found above obvious highs, where traders who are short will have their stop orders placed to buy back their positions.
• 😀 Sell-side liquidity is found below obvious lows, where traders who are long will have their stop orders placed to sell their positions.
• 😀 Identifying areas of liquidity, like equal highs and lows, helps determine where the market might reverse or break out.
• 😀 A common approach is to look for obvious liquidity above and below price ranges to spot potential market targets.
• 😀 On a 5-minute chart, liquidity zones are typically found by marking highs and lows, while higher time frames like the 15-minute chart can give a clearer view.
• 😀 Traders can estimate stop-loss locations based on the position of prior highs and lows, adjusting to market movements accordingly.
• 😀 It's important to monitor liquidity zones on smaller timeframes (like the 1-minute chart) after significant stop losses have been taken.
• 😀 Once liquidity is taken (stops triggered), the market often moves in the opposite direction, offering opportunities for setups like buying or shorting.
• 😀 The '2022 mentorship setup' refers to a strategy used after stop losses are run, waiting for a displacement and filling a fair value gap, typically targeting discounts.
• 😀 Relative equal highs and lows are significant liquidity zones; they act as potential targets, especially if they haven't been taken out yet.

Q & A

What is liquidity in the context of this video?

Liquidity refers to where people's stop orders are resting, typically at the most obvious highs and lows on a chart. These areas represent potential targets for price movement.

Where can you typically find buy-side liquidity?

Buy-side liquidity is generally found above the most obvious highs on a chart, where individuals who took short positions have placed their stop orders to buy back.

Where is sell-side liquidity typically located?

Sell-side liquidity is typically located below obvious lows on a chart, where people who took long positions have placed their stop orders to sell their positions.

What does it mean when liquidity is taken?

When liquidity is taken, it means that the stops placed at key levels (like highs or lows) are triggered, which may lead to a price move in the direction of the liquidity being absorbed.

What is a common strategy for identifying targets once liquidity is taken?

Once liquidity is taken, traders often look for setups that align with the price movement. For example, if buy-side liquidity is taken, traders may look for a short setup, or vice versa.

How does the 15-minute chart help identify liquidity better than the 5-minute chart?

The 15-minute chart offers a clearer, more comprehensive view of price action and liquidity levels, as it smooths out smaller fluctuations that may be harder to identify on a 5-minute chart.

How can traders identify areas where people have their stop orders in range-bound markets?

In range-bound markets, traders can look for areas where obvious highs and lows exist. Traders will often place stops just above or below these levels, and these can serve as targets for liquidity runs.

What is a '2022 mentorship setup' mentioned in the video?

A '2022 mentorship setup' refers to a specific trading strategy where after taking out stops, traders look for certain conditions, such as a short-term high being created and a fair value gap forming, to enter a trade in a discounted range.

What is a fair value gap, and why is it significant?

A fair value gap is an area where price quickly moves, leaving a gap in price action. This is significant because it often acts as a key level where price may return to for a correction or continuation.

What happens when relative equal highs and lows are formed?

Relative equal highs and lows become targets for later price moves. When these levels are not immediately hit, they remain as potential targets for future liquidity runs.