Liquidity Concepts SIMPLIFIED

Summary

The video script delves into the concept of liquidity in trading, focusing on how retail traders can leverage institutional trades. It explains that liquidity is the level where past trading activity has occurred and where retail traders can capitalize on institutional support. The script outlines various types of liquidity, including support and resistance, trendline, and failed to break (FTB) liquidity. It emphasizes the importance of identifying where retail traders place their stop losses, as these levels can attract price movement. The video also discusses inducement strategies, where price action attempts to entice traders into taking positions before reaching key levels. It highlights the significance of the 50% level in inducement and the potential outcomes of price action, such as continuation or reversal, which can indicate traps for traders. The summary provides a comprehensive yet concise insight into the intricate dynamics of liquidity and its strategic use in trading.

Takeaways

• 💡 **Liquidity Defined**: Liquidity refers to the level at which trading activity has previously occurred, influencing future price movements.
• 📈 **Institutional Influence**: Institutions set price levels that retail traders may exploit, aiming to identify where retail traders place their stop losses.
• 🔄 **Support and Resistance**: Equal highs and lows represent support and resistance liquidity, acting as magnets to attract price movements.
• 📉 **Trendline Liquidity**: Trendlines serve as non-quantifiable resistance levels where retail traders often place trades, influencing price action.
• 🚫 **Failed to Break (FTB)**: When price approaches a supply level but fails to break it, it forms a valid resistance level where stop losses are set, attracting price back to test it.
• 🔃 **Failed to Close (FTC)**: A characteristic where price wicks through a level without closing below it, setting up a magnet for future price attraction.
• ⏱️ **Liquidity Function**: After attracting price, liquidity levels can either continue the trend or reverse, indicating a potential trap for traders.
• 🕳️ **Stop Loss Traps**: Stop losses set at previous resistance points can be triggered, absorbing liquidity and causing price to move in the opposite direction.
• 📌 **Point of Interest**: Traders look for levels where price reacts but doesn't fully reach, potentially setting up future inducement strategies.
• 🔑 **Inducement Strategy**: Price may react from a level close to a point of interest to entice traders, before revisiting and reacting from the actual level.
• 🎯 **Valid Inducement**: Successful inducement occurs when price approaches the 50% level of a range and then moves directly to a discounted point of interest.

Q & A

What is liquidity in the context of trading?

Liquidity in trading refers to the ease with which assets can be bought or sold without affecting the asset's price. It is often associated with the presence of sufficient buyers and sellers at a specific price level, allowing for smooth trading activities.

How do retail traders take advantage of institutional sponsorship?

Retail traders may take advantage of institutional sponsorship by entering trades at price levels where institutions have previously purchased, expecting that the institutional activity could lead to price movements that are profitable for the retail trader.

What is the significance of support and resistance levels in liquidity?

Support and resistance levels are significant in liquidity as they represent price points where buying or selling pressure is expected to be strong. These levels can act as magnets for price, either attracting it to continue in a trend or reversing it.

How does a trendline contribute to liquidity?

A trendline contributes to liquidity by serving as a visual representation of price movement. When price approaches a trendline, it can attract the price towards it, acting as a magnet, especially if retail traders are using the trendline as a reference for their trading decisions.

What does 'failed to break' liquidity imply?

'Failed to break' liquidity implies that the price approached a certain level but did not manage to maintain a move beyond it. This can result in stop losses being triggered, creating a new level of liquidity that the price may be incentivized to revisit.

How can the absorption of liquidity influence future price movements?

The absorption of liquidity can influence future price movements by creating a new price level where there is less resistance. Once the liquidity is absorbed, the price is more likely to continue moving in the direction of the prevailing trend or break through previous resistance levels.

What is the primary function of liquidity in trading?

The primary function of liquidity in trading is to attract price to certain levels over time. Once a level of liquidity is absorbed, the price may continue in the existing trend or reverse, potentially setting a new range.

What is meant by a 'stop point' or 'stop loss' in trading?

A 'stop point' or 'stop loss' is an order placed by a trader to sell a security when it reaches a certain price. It is used to limit potential losses in case the market moves against the trader's position.

How does inducement work in the context of trading?

Inducement in trading is a strategy where the market appears to react from a level close to a trader's point of interest, enticing the trader to take a position. The market then revisits the level and reacts from it, potentially leading to a profitable trade if the inducement is successful.

What are the characteristics of a valid inducement?

A valid inducement typically occurs within the 50% range of a price level, with the reaction happening at the trader's point of interest located at the extremes of the range. This suggests that the inducement is effective in enticing traders to take positions before the price reaches the point of interest.

Why is it important to consider the location of the point of interest in relation to the premium and discount zones?

The location of the point of interest in relation to the premium and discount zones is important because it can influence the likelihood of a successful trade. Traders prefer their points of interest to be in the discount or premium zones to take advantage of price levels that may offer better entry points for trades.

Outlines

00:00

💹 Understanding Liquidity and Retail Trader Behavior

The first paragraph explains the concept of liquidity in the context of trading. It focuses on how retail traders might capitalize on institutional trading activities, particularly by identifying where their stop losses are likely to be placed. The paragraph introduces the idea of support and resistance liquidity, characterized by equal highs and lows, and how these levels can act as magnets to attract price movements. It also discusses trendline liquidity and how retail traders use trendlines to determine resistance levels. The concept of failed to break (FTB) liquidity is introduced, where a previously identified supply level rejects price, leading to the formation of stop losses above the swing, creating a new liquidity area that the price is incentivized to attack.

05:12

📉 Failed to Close (FTC) and Inducement in Trading

The second paragraph delves into the FTC liquidity model, where the price wicks through a level without closing below it, making that level a magnet for future price attraction. It discusses the primary function of liquidity as a point that will eventually be absorbed by the market, with the subsequent potential for price continuation or reversal, indicating a trap for traders. The paragraph also explains the concept of inducement, where the price approaches a level of interest without fully reaching it, enticing traders to take positions before the price actually reaches and reacts from that level. The importance of trading liquidity and inducement is highlighted, with an emphasis on identifying valid inducement opportunities.

10:13

🔍 Identifying Valid Inducement and Trading Strategies

The third paragraph provides a detailed examination of the inducement process and what constitutes a valid inducement. It outlines the four parts of a range (0%, 25%, 50%, 75%, 100%) and emphasizes the significance of the 50% level for inducement to be effective. The paragraph explains that for a successful inducement, the price should react from around the 50% level and move towards the point of interest without reaching the premium zone. It also touches on the concepts of discounted and premium levels, advising traders to buy at a discount and sell at a premium. The paragraph concludes with an example of a successful inducement, where the price moves to the 50% level, reacts, and then proceeds directly to the point of interest, indicating an effective trading opportunity.

Keywords

💡Liquidity

Liquidity in the context of the video refers to the level at which trading activity occurs, particularly where institutions and retail traders engage in buying or selling assets. It is a key concept as it helps identify potential entry and exit points for trades based on historical trading patterns. For instance, the script mentions 'liquidity is an area or a level where business was conducted previously,' highlighting its importance in understanding market dynamics.

💡Support and Resistance

Support and resistance are fundamental concepts in trading that represent price levels where the demand (support) or supply (resistance) for an asset is expected to be strong enough to prevent the price from moving in a certain direction. In the video, these levels are used to identify where retail traders might have entered trades and where their stop losses could be placed, as illustrated by 'support and resistance liquidity which is your equal highs and equal lows.'

💡Trendline Liquidity

Trendline liquidity is a concept that involves using trendlines to identify potential areas of liquidity. A trendline is a line drawn on a price chart to show the direction of price movements. The script explains that 'liquidity is resting underneath the trendline,' which becomes a magnet for price, indicating that price movements are likely to be influenced by the presence of this trendline.

💡Failed to Break (FTB)

Failed to break liquidity occurs when a price approaches a certain level but fails to maintain a move beyond it, resulting in a reaction that forms a new level of liquidity. The video describes this as 'price formed the supply level, an aggressive reaction from the supply level, forming the liquidity to later be absorbed.' This concept is crucial for understanding how price action can lead to new trading opportunities.

💡Failed to Close (FTC)

Failed to close liquidity is characterized by a candlestick pattern where the price wicks through a certain level but never closes below it, making that level a magnet for future price action. The script states, 'the candle never closes below the range it just wicks through,' indicating that this level can attract the price and potentially lead to a continuation of the trend or a reversal.

💡Stop Loss

A stop loss is an order placed by a trader to limit their loss on a position. In the context of the video, it is mentioned in relation to retail traders and how their stop losses can accumulate at certain price levels, creating liquidity. The script refers to 'their stop losses would rest in the near swings,' which implies that these levels can be significant in predicting future price movements.

💡Inducement

Inducement in the video refers to a price action strategy where the market appears to react from a level close to a point of interest, with the intention of enticing traders to take a position before the price actually reaches that level. The script describes it as 'price attempts to entice you into taking a good position,' which is a psychological aspect of trading that can influence decision-making.

💡Point of Interest

A point of interest is a specific price level that traders are watching closely, often because it has historical significance or represents a potential turning point for the price. The video uses this term to discuss how traders anticipate price reactions at these levels, as in 'now you're waiting for price to revisit that level.'

💡Order Block

An order block is a price level where there is a concentration of buy or sell orders, which can influence the price action. The video mentions 'this is your order block,' referring to a level where significant trading activity has occurred or is expected, which can act as a support or resistance level.

💡Stop Hunt

Stop hunt is a trading strategy where the market appears to be driven towards a stop loss level to trigger a large number of stop orders before reversing direction. The script refers to 'this was your stop hunt,' indicating a situation where the market behavior is aimed at hitting stop loss levels to cause a significant price move.

💡Fair Price

The fair price is a term used to describe a price level that is considered to be a reasonable or typical trading level based on historical data or current market conditions. The video discusses it in the context of inducement, where 'you would want your inducement to happen in the 50 percent,' suggesting that a price level halfway between a discount and a premium might be a fair price where inducement can effectively occur.

Highlights

Liquidity is an area or level where businesses were previously conducted, and it's key to understanding how retail traders and institutions interact in the market.

The main objective is to determine where retail traders place their stop losses in relation to institutional trades.

Support and resistance liquidity is characterized by equal highs and lows, which indicate levels where institutions have previously sold.

Price resistance levels act as magnets, attracting the price to eventually break through.

Trendline liquidity is identified when price action is influenced by trendlines, which can attract price without equal lows.

Failed to break (FTB) liquidity occurs when a supply level is tested, rejected, and then becomes a point of attraction for the price.

In FTB situations, stop losses are often set above the swing, creating liquidity that can be absorbed by price action.

Failed to close (FTC) liquidity is characterized by a candle that never closes below a certain range, making that level a magnet for future price action.

Liquidity levels are eventually absorbed by price action, which can then continue with the trend or reverse, indicating a potential trap.

The stop point acts as a trap for traders who believe in a breakout, only for their stop losses to be triggered and liquidity absorbed.

Inducement in trading involves price approaching a level of interest without fully reaching it, enticing traders to take positions.

A valid inducement occurs when price action reaches around the 50% level of a range before moving towards a point of interest.

Trading liquidity and inducement can be done in a continuation form, but the focus here is on the inducement aspect.

When trading inducement, it's important to locate liquidity levels and wait for price to revisit these points.

Successful inducement is marked by price moving directly to a discounted level after an initial 50% approach and reaction.

The four-part Fair Price Model (FIP) is used to determine discounted and premium levels for effective inducement trading.

Ideally, inducement should happen around the 50% level to avoid a Failed to Break (FTB) situation, which would rest liquidity at a higher level.

Traders should aim to buy at a discount and sell at a premium, using the extremes of the range for their points of interest.

The stop hunt strategy involves identifying liquidity levels and using them to predict future price action and potential traps for traders.

Transcripts

so what is liquidity in simple terms

liquidity is an area or a level where

business was conducted previously

institutions purchased a price at a

specific level and some retail Traders

end up taking advantage of the

institutional sponsorship and take the

trade and our main objective here is to

find out where these retail Traders stop

losses rest at

so in this example you can see price

being purchased at this demand level and

we're not focused on the entry or why

price was purchased there

we're looking at if some retail Traders

took advantage of this trade where would

their stop losses rest at

their stop losses would rest in the near

swings

and this is where the liquidity will be

rested so let's get into this

so the first type of liquidity we're

going to cover is your support and

resistance liquidity which is your equal

highs and equal lows

as you can see price found resistance at

this specific level what does that mean

that means institutions sold at this

level and Retail Traders might have

taken advantage of this so now this

level is incentivized to attract price

and it will act as a magnet for price to

later do what

run over this level

so as you can see here price is finding

resistance and this level be used as a

magnet for price to run through it

so next we're going to cover the

trendline liquidity

if you look here you don't see equal

lows You Don't See

you can pinpoint where the resistance is

coming from now we could be coming from

internal liquidity but a lot of times

retail Traders use what you call a trend

line

and now liquidity is resting underneath

the treadline so now that trend line

becomes a magnet

to attract price

so here we have an example of trendline

liquidity

price rejected from the trend line and

attracted price

so next up you have your FTB your failed

to break liquidity

you can see here you have a supply level

formed and price approaches this level

and rejects so now you have evidence

that that level was valid and Retail

Traders might be a part of that move so

anybody that purchased price at that

level their stop losses would go on the

swing above

and Above That Swing would be resting

the stop losses which would be your

liquidity and price would be

incentivized to attack that level one

more time

so here's an example of your failed to

break liquidity

price formed the supply level

an aggressive reaction from the supply

level

forming the liquidity to later be

absorbed

so let's take a look at this example

you always want to look to the left and

you want to look to what happened

previously what happened here

we know that there was a supply level

here price came to the supply level and

reacted and broke structure what can we

understand from this motion we can

understand is that there were cell

orders injected here that push price

down

but there were so many soldiers that

overpowered the buy orders here the push

price down so now we know if price comes

back to this level if price comes back

to this level there's not enough sell

orders anymore why because this whole

order has been used here so that means

there's not enough sell orders to reject

price one more time and price will more

than likely continue above so this would

be your FTB your failed to break

liquidity

so now you mark up your liquidity

so now this area would act as a magnet

and it would attract price

and the liquidity has been absorbed

next we have FTC failed to close

liquidity and the main characteristic of

this liquidity model is that the candle

never closes below the range it just

Wicks through

the candle wicks through and that level

becomes a magnet for price to attract

so what is the primary function of

liquidity

so we know that liquidity will attract

price in due time this level will be

absorbed

but what happens next price can always

continue above and completely continue

with the trend or price can reverse

and come back and set a range and what

does that reverse indicate that

indicates a trap a stop point

and what is the function of the stop

line the stop point is a trap in this

situation everybody that thought this

was a Breakout

that price is going to continue higher

got trapped

and at the same time the stop losses of

food sold and the previous resistance

Point their liquidity got absorbed so

let's take a look at this example so

here you have your demand Zone here you

have your order block

price reacts from this order block

price reacted from this order block and

shot up

and broke structure

so what do we know now we know that

there was the buy orders that were

injected here were graded in the cell

orders that could have been resting here

so now we know when price does come back

to this level it's more likely going to

break through this level instead of

rejecting again why because there might

not be enough buy orders in this demand

order block

so price

is breaking through this level

and price broke to this level but what

happened price came back into the range

forming the Trap the stoplight

so the stop button has been formed

everybody that tried to sell in this

area

so everybody that tried to sell in this

area thinking this is a breakout and

price is going to continue lower got

trapped right here and everybody that

purchase price right here their stop

losses got taken

and price will continue the opposite way

that's the effects of a star plan

let's talk about inducement what is

inducement

here you have your point of Interest

price approaches your level but doesn't

get all the way to your point of

Interest

and forms a reaction

what is price trying to do is trying to

entice you into taking good position

tries to force you into abandoning your

point of Interest as if price is not

going to reach that level

price comes back reacts from that same

level and rejects forming liquidity

engineering liquidity they're trying to

entice you into taking a short

before price actually takes the

liquidity goes to your point of interest

and reacts

so your point of interest is formed and

now you're waiting for price to revisit

that level

price attempts to induce You by reacting

from a level close to your point of

interest to later on actually visit your

point of interest and then react from it

so how would you trade liquidity and

inducement of course you can trade

liquidity in a continuation form but

let's focus on the inducement part so

first of all you want to locate

the liquidity

in this case

here's your liquidity

kind of liquidity is this this is

this is FTC failed to close why is it

your failed to close

because of this wig

so now you know liquidity is resting

under this level

so now you look for your point of

Interest

in this case I'm looking at this

discounted order block

so now what you're waiting for is for

price to run on liquidity go to your

point of interest and then react

so let's talk about the inducement

secrets and what makes a valid

inducement

so here you have your range

this would be your range so now we pull

out our FIP that's broken into four so

basically

the four parts are

the four parts are

0 25 50 75 100 and this would be your

discounted level and this would be your

premium level and this would be your

fair price so what you would want

essentially is you would want your

inducement to happen in the 50 percent

if you want your inducement to be here

you wouldn't want your inducement to be

here and then for price to reach your

level or even close by to the premium

why because think of it as this

think of it as you have orders here in

the premium Zone

which

which your point of interest is located

in you don't want price to come here and

come back up why because if it hits this

level and then comes back up and then

comes again more than likely now you

have a FDB situation

now you have a FTB situation which means

the liquidity is rested right here and

price will more likely go against you

so again you would want your liquidity

in the 50 and the reaction of course

is in your point of interest that always

has to be located in your extremes if

you're buying you want to buy a discount

if you want to sell you want to sell in

premium

so let's see

okay here you have your inducement

price went to fifty percent and came

back up so now if price goes straight to

your discounted level you would expect

to get into a buy here and this is what

makes a successful inducement

and here you have it

this was your liquidity

and this was your stop hunt

that went straight to your point of

Interest