I Decoded The Liquidity & Manipulation Algorithm In Day Trading

Summary

This video script dives into the concept of liquidity extraction in financial markets, explaining how it impacts market movements and traders. It highlights the importance of market liquidity and how smart money exploits it to flush out weak positions, often against the main trend. The script teaches viewers to identify potential liquidity zones and avoid being caught in market traps, emphasizing the significance of structural symmetry and volume analysis in trading strategies.

Takeaways

• 💰 Price movements often squeeze market participants and are influenced by liquidity extraction strategies.
• 🔄 Liquidity is crucial for market functionality and competition, with ample participation from both buyers and sellers.
• 🎯 Market makers and smart money often engage in liquidity hunting, targeting weak longs or shorts to flush them out of the market.
• 📉 Liquidity clear-outs can form against the main trend, especially in setups that are counter to the trend.
• 🧠 Smart money is aware of retail traders' tendencies and uses this knowledge to trap them with poor trade locations and stop-loss triggers.
• 📈 Structural symmetry is essential for identifying potential liquidity clear-outs, with consistent bounces indicating higher liquidity zones.
• ⏳ Time plays a significant role in consolidating orders in key liquidity zones, with the potential for increased liquidity as time passes without a break in major highs/lows.
• 🚫 Institutional players avoid low liquidity areas to prevent significant price impact from their large orders.
• 🔄 Rapid reversals after a critical low/high signifies a liquidity clear-out, with the speed of rotation varying by market liquidity.
• 🚨 Traders should monitor the lowest low or highest high of a structure for condensed stop losses and potential breakout points.
• 📊 Significant volume traded at the clear-out area is a key indicator of a liquidity hunt, signaling market maker activity.

Q & A

What is the primary purpose of liquidity extraction in the market?

The primary purpose of liquidity extraction is to flush out the losing players, known as weak longs or weak shorts, from the market, thereby rewarding one side and punishing the other.

Why is liquidity considered the most important element for a market to function and be competitive?

Liquidity is the most important element because it ensures ample participation from both buyers and sellers, which is essential for a market to operate smoothly and competitively.

What is the difference between trading the EUR/USD and a less liquid instrument like CAD/NZD?

Trading the EUR/USD offers different conditions than trading a less liquid instrument like CAD/NZD due to the difference in market participation and liquidity, which affects trading dynamics and opportunities.

Why do smart money or market makers extract liquidity from the market?

Smart money or market makers extract liquidity to take advantage of market inefficiencies and to profit from the removal of weak positions, which can lead to price movements in their favor.

How do liquidity clear-outs typically form in relation to the main trend?

Liquidity clear-outs often form against the main trend, especially in an extended trend structure, where there is a buildup of liquidity zones that smart money targets, often in a counter-trend setup.

What is the significance of structural symmetry in identifying potential liquidity clear-outs?

Structural symmetry is significant because it indicates areas where the price consistently bounces from demand/support or resistance/supply levels, making these areas more likely targets for liquidity clear-outs.

How can retail traders avoid becoming targets of liquidity clear-outs?

Retail traders can avoid becoming targets by identifying potential liquidity zones, understanding market structure, and joining the game of market makers instead of being caught in the trap.

What is the '10 candles rule' mentioned in the script, and why is it important for traders?

The '10 candles rule' is a guideline that suggests the price should reverse back inside the structure within 10 1-minute candles after a liquidity clear-out. It helps traders time their entries and exits more effectively.

Why is volume analysis crucial when trading a liquidity clear-out pattern?

Volume analysis is crucial because it helps confirm the strength of the liquidity clear-out. A significant increase in volume during the clear-out indicates strong market participation and potential for a rapid price reversal.

What is the difference between a targeted and a non-targeted liquidity clear-out?

A targeted liquidity clear-out is initiated by smart money or market makers, while a non-targeted one is triggered by overall market action. The distinction can be identified by observing where the price starts the move and if it is consistent with the structure.

How can retail traders use price alerts to their advantage when trading liquidity clear-outs?

Retail traders can use price alerts below structural lows or above highs to identify potential liquidity clear-outs. This allows them to minimize screen time, be more patient, and react quickly when the alert is triggered.

Outlines

00:00

📈 Market Movements and Liquidity Extraction

This paragraph discusses the concept of price movement within market structures and the impact of liquidity on trading outcomes. It emphasizes the importance of liquidity in market functionality and competitiveness, highlighting how smart money or market makers engage in liquidity extraction to flush out weak market participants. The paragraph also explains how liquidity clear-outs often occur against the main trend and how smart money exploits retail traders' tendencies and strategies, leading to a trap that results in stop losses and position liquidation. The role of structural symmetry in identifying potential liquidity clear-outs is introduced as a critical concept for traders to consider.

05:01

🕒 Time and Liquidity Accumulation in Trading

The second paragraph delves into the relationship between time and liquidity accumulation, explaining how the passage of time without a break in major price levels leads to increased liquidity around those levels. It discusses the concept of liquidity clear-outs and stop loss hunting, differentiating between the two based on the structure and symmetry of price levels. The importance of recognizing symmetrical structures for identifying potential liquidity clear-outs is stressed, along with the significance of rapid price reversals post-clear-out as a signal for market re-entry. The '10 candles rule' is introduced as a guideline for timing the reversal after a liquidity clear-out in the context of different time frames.

10:02

🚨 Trading Strategies for Liquidity Clear-Outs

The final paragraph provides practical advice on trading liquidity clear-outs, starting with the use of price alerts to identify potential symmetrical structures. It underscores the importance of focusing on volume during a clear-out, using a downtrend example to illustrate the process of market makers initiating a heavy selloff to remove liquidity. The paragraph details the criteria for a successful entry post-clear-out, including the necessity of the price reclaiming support and the significance of high volume as an indicator of a genuine clear-out. It also contrasts symmetrical and asymmetrical structures, advocating for the preference of symmetrical ones due to clearer entry points, and concludes with an encouragement to apply these insights to enhance trading strategies.

Keywords

💡Liquidity

Liquidity refers to the ability to buy or sell an asset quickly without affecting its price. In the context of the video, liquidity is crucial for a market to function effectively and competitively, as it requires ample participation from both buyers and sellers. The script discusses how liquidity is the primary target for market makers, who aim to extract it to flush out losing players, known as weak longs or weak shorts.

💡Market Makers

Market makers are entities that facilitate the trading of financial instruments by providing liquidity. They do this by placing bids and offers for securities. In the video, market makers are portrayed as 'smart money' that can manipulate the market to their advantage, often at the expense of less sophisticated traders.

💡Liquidity Extraction

Liquidity extraction is the process by which market makers or institutional players remove liquidity from the market, often by triggering large sell or buy orders. The video explains that this is done to initiate a 'liquidity clear-out,' which is a strategy to eliminate weak positions and consolidate control over the market.

💡Liquidity Clear-Out

A liquidity clear-out is an event where the market moves sharply against a particular direction, causing stop losses of traders to be triggered and their positions to be liquidated. The script describes how this is often done around areas of high liquidity, where many traders have placed their stop losses, and is a common practice in markets like Forex and crypto.

💡Structural Symmetry

Structural symmetry in trading refers to the consistent pattern of price movement around key support or resistance levels. The video emphasizes the importance of structural symmetry for identifying potential liquidity clear-outs, as these symmetrical patterns are often where the market makers focus their efforts.

💡Stop Loss Hunting

Stop loss hunting is a trading strategy where market participants aim to trigger the stop loss orders of other traders, causing a sudden price movement. The video explains that while stop loss hunting can occur without a specific structure, liquidity clear-outs usually happen around dense price structures with multiple bounces, indicating a higher concentration of stop losses.

💡Retail Traders

Retail traders are individual investors who trade financial instruments for their own account, as opposed to institutional or professional traders. The script mentions that retail traders often fall prey to the strategies of market makers, who understand their tendencies and use this knowledge to trap them into poor trade locations.

💡Price Alerts

Price alerts are notifications set by traders to alert them when a security reaches a certain price level. In the video, the use of price alerts is recommended as a tool to identify potential liquidity clear-outs, allowing traders to be prepared to act when the market moves in a certain direction.

💡Volume

Volume refers to the number of shares or contracts traded in a security or market during a given period. The video script highlights the importance of volume in identifying liquidity clear-outs, as significant volume traded at the point of a clear-out indicates the market maker's activity.

💡Breakout Traders

Breakout traders are those who enter a trade in anticipation of a price moving past a certain level, often following a trend. The video describes how breakout traders can be trapped during a liquidity clear-out when the price moves past a critical level but then reverses quickly, causing their trades to be stopped out.

💡10 Candles Rule

The '10 candles rule' mentioned in the video is a personal trading rule that states the price should reverse back into a structure within 10 one-minute candles after a liquidity clear-out. This rule is used to time the entry into a trade following a clear-out and is an example of how traders can use specific criteria to identify trade opportunities.

Highlights

Price movements often squeeze market participants, rewarding some while punishing others.

Liquidity extraction is a key concept for understanding market movements against traders.

Understanding market depth and liquidity is crucial for traders at any experience level.

Different trading instruments offer varying liquidity conditions, affecting trading strategies.

Liquidity is essential for a functional and competitive market, requiring ample buyer and seller participation.

Smart money and market makers often extract liquidity, a practice known as liquidity hunting.

Liquidity clear-outs often form against the main trend, targeting weak longs or shorts.

Smart money can predict and exploit retail trader behavior, using it to trap them in the market.

Liquidity clear-outs are common in liquid markets like Forex or stocks with high trading volume.

Structural symmetry is vital for identifying potential liquidity clear-outs in the market.

Time plays a significant role in consolidating orders and increasing liquidity around key zones.

A liquidity clear-out is characterized by a rapid price reversal after a critical low/high is taken out.

Retail traders should aim to spot potential liquidity zones to join the market makers and avoid being targeted.

The speed of price rotation back after a clear-out varies depending on the market's liquidity.

Monitoring the lowest low or highest high of a structure is crucial for identifying stop loss concentrations.

The difference between targeted and non-targeted liquidity clear-outs lies in the initiator of the move.

The '10 candles rule' suggests that the price should reverse back within 10 one-minute candles post-clear-out.

Using price alerts below structural lows or above highs can help identify liquidity clear-out opportunities.

Significant volume traded at the clearout area is a key indicator of a successful liquidity hunt.

For a liquidity clear-out trade, the price must reclaim support or resistance quickly post-clear-out.

Asymmetric structures can make entry conditions less clear, making symmetrical structures more preferable for trading.

Transcripts

Price tends to move from structure to structure, squeezing one side of the market participants

most of the time.

It rewards one side of the market, while punishing the opposite side of participants.

And liquidity clear outs are constant processes observed on the markets every day.

Today we’ll talk about liquidity extraction and you’ll finally understand why the market

moves against you the moment you enter the market.

So, if you could, like, subscribe to the channel, and stick around for the full video.

Do you know the depth of the market you are trading?

Regardless of how long you’ve been trading, at some point you should have questioned the

depth of the market you are trading.

In other words, its liquidity.

Make no mistake, trading the EUR/USD for example offers different conditions than trading an

instrument like CAD/NZD (Canadian Dollar versus the New Zeeland Dollar).

Or Bitcoin versus Shiba Ina Coin.

Or Tesla versus some random penny stock.

Liquidity is the #1 element to make a market functionable and competitive.

For a market to be rich in liquidity, there must be an ample participation of both buyers

and sellers.

This is why it makes sense for smart money or market makers to extract the liquidity

from the market.

Liquidity hunting is a very common practice.

It is nothing more than the art of flushing the losing players out of the market, which

are known as weak longs or weak shorts.

Liquidity clear-outs will often form against the main trend

The larger the liquidity zone buildup, the more likely it is for that zone to be targeted

by the smart money, especially if it is a counter trend setup.

Often, liquidity clear-outs will form against the main trend.

For example, in an extended bullish trend structure, in a consolidation, you will often

see a clear out of highs and a price reversal downwards.

This is more common in very liquid markets such as Forex or stocks that trade on strong

volume.

And why is that?

Because smart money knows how retail traders think.

Smart money knows how retail traders use different indicators, moving averages, candlesticks,

and chart patterns in their attempt to day trade or scalp the markets.

Smart Money can easily trap retail traders into the market at poor trade locations and

then move against their positions, stopping them out.

They know that retail traders are programmed with the phrase “trend is your friend”.

That’s why many clear-outs will be formed against the overall trend direction or against

overall retail trader participation.

Here’s how liquidity is often positioned around structures in the market.

Many traders will use these price levels to place their entries or exits at, but more

frequently, their exits or stop losses.

And these are exactly the zones used by smart money to trigger a liquidity clear out.

Institutional players cannot trade the same as the retail trader, because in low liquidity

price areas, they might push price too much with large orders.

So they use high liquidity zones to put their own large orders in the market without having

too much impact on the price.

Clearouts of liquidity are frequent in crypto and Forex markets because a strong trending

market attracts many un-experienced traders who step into margin trading, usually buying

around the lows and highs.

Since they are unaware of the trap, it is relatively easy for the market maker to replay

the pattern repeatedly, stopping the traders with liquidity clear-outs.

Structural symmetry is most important concept when it comes to liquidity clear out

One critical concept for a liquidity clear out is the consistency of structural symmetry.

Most targeted clear outs will happen around structures where the price is consistently

bouncing from a demand/support level or resistance/supply level for multiple times before it actually

breaks it.

So very important, you should only focus on such structures to identify and trade liquidity

clear-outs.

The more bounces in structure, the better.

The more time it passes, the more the liquidity will increase

As time passes and if price cannot break areas with multiple highs or lows, chances are the

liquidity around those price levels will increase with time.

The more time it passes, the more the liquidity will increase (if major highs/lows don’t

break).

Because of this factor, if you want to trade a liquidity hunt pattern, you should be aware

of how time plays a role in consolidating the orders above/under key liquidity zones.

Liquidity clear-out and stop loss hunting Now, a clear out is a liquidation event where

the stop losses of buyers or sellers are taken out, and the breakout traders are trapped

in.

Liquidity clear-out and stop loss hunting are similar concepts.

Stop loss hunting can happen around any price or no structure at all, while a liquidity

clear-out will most of the time happen around dense price structures with multiple bounces.

So remember: liquidity clear-outs are most common around symmetrical structures where

many traders will watch the same price level or place stop losses around the same price

level.

Therefore market makers would want to see that level broken and enter their positions

while liquidation is taking place and absorb opposite orders.

Look for a rapid reversal of price back into the structural support or resistance

For retail traders like you and me, the aim should be to spot such potential liquidity

zones and join the game of market maker and to avoid being a liquidity target.

A liquidity clear out should always present itself with a rapid, strong reversal move

after a critical low/high is taken out—basically a rapid rotation of price back into the structural

support or resistance.

The speed of rotation back will usually depend on the market or the liquidity of the market.

In some markets, the reversal back might take 15 or 30 minutes as the smart money needs

to collect as many orders as possible over time, while in FX or crypto, the reversal

will be much quicker on average (between 1-15 min) since those markets are much more liquid.

Monitor the lowest low or highest high of a structure

If the structure is not even on highs or lows positioning (for example, when highs or lows

are connected through a trendline instead of flat line), then the main area to watch

is the lowest low or highest high of structure, that is where the majority of condensed stop

losses will sit and where breakout traders might initiate other positions.

This is the difference between a flat vs. a trend line positioning of lows and the importance

of deepest low.

No matter how the structure is positioned, the low of the structure will be the key level

that the market maker will want to clear out and where the majority of stops will likely

sit.

There’s a difference between a targeted and a non-targeted liquidity clearout, meaning

triggered by the market maker or triggered by overall market action.

On the left side we have a targeted attempt and on the right a non-targeted one.

The difference between strong quick moves initiated by the smart money and the move

triggered by overall market action is usually spotted depending on where price starts the

actual move and if that move is consistent.

In the case of a targeted attempt, most of these moves will be initiated in the middle

of the structure where not much liquidity sits.

Meanwhile, strong moves triggered by overall market action are usually going to be on very

symmetrical and obvious price extremes.

The 10 candles rule

After the liquidity clear out under the lows or above highs, the price should start reversing

back inside the structure relatively quickly.

Timing is the key.

Let’s say you’re a scalper and you’re using 1 minute chart.

My own rule is that it should not take more than 10 1-minute candles for the price to

rotate back above support.

This depends a lot on how big the structure is, how many candles are in each leg of the

structure.

The more candles per leg, the longer it might take for the liquidity clear out move to happen,

but it should not be more than 10 candles.

In the best scenario, it happens within the first 3 to 5 candles.

Again it’s a relative concept as it scales with the time frame chosen.

Use price alerts below the structural lows or above highs

To trade a liquidity clear-out, you need a clear plan to find the pattern.

Using price alerts is a useful way to support the searching process.

The plan is quite simple.

Once the potential symmetrical structure is spotted (with variables that fit a potential

liquidity clearout), you place an alert below the structural lows or above highs, depending

if it's a bull or bear pattern.

This is important because once an alert is placed, you can relax and do other stuff and

only come back once the alert rings and the price clears the required liquidity area.

It’s an important tip that helped me a lot.

Using price alerts is critical to minimize the screen time and to be more patient and

"fresh" as a trader.

At the liquidity clearout area, there should be significant volume traded

The key when trading a liquidity hunt is to focus on volume.

At the clearout price area, there should be significant volume traded.

Let’s analyze this liquidity clearout pattern.

We have a clear downtrend, with lower lows and lower highs in the structure.

This is our main focus point, the lowest low in the structure.

This is where our price alert should be.

A drop into the lows will usually be initiated by the market maker with a heavy market order

that will remove liquidity and swipe price under lows.

Look at the volume traded at the liquidity hunt.

It increased considerably once the lowest low in the structure was taken out.

For an entry, you should wait for the liquidity clear-out and then for the price to start

moving back above support for a long entry.

Your risk should be the lowest low of the clear-out.

This is where your stop loss should be.

Here’s another liquidity hunt.

-we first observe a heavy selloff ahead of structure

-we then find a symmetrical structure with approximately even lows (ensuring even stop

loss placement under them) - high volume on the clearout, with the highest

volume candle in the whole structure - volatility on the market is high (meaning

we have a wide range) - and we have a sharp and quick reversal after

clearout and a reclaim of the previous support So after the liquidity clearout, an important

sign should be the volume.

The volume traded was the highest 1-minute volume candle inside the whole price structure.

As price quickly reclaimed support and then pushed higher, this was a good moment to open

a buy position, with a stop loss below the most recent low.

A key component for trading the clearout is that it has to reclaim the support for a long

trade (or resistance for short trade).

If it does not reclaim, there is no trade in the first place, it’s a breakout.

Here’s an example with high volume clearout under lows as the long traders are stopped

out, but the price did not reclaim the support level, thus this is not a long trade.

Remember this important point: the faster the price reclaims support and pushes above

after the clearout, the better the trade.

On the best trades, price should reclaim support within the first 5 candles after the clearout.

If the structure is not symmetric (with evenly positioned lows), it is hard to base the entry,

that is why I prefer to trade structures that are clean and symmetric.

This allows precise entry conditions across all trades.

Let’s look at this asymmetric structure and clearout.

You can observe that lows are not evenly positioned.

We even have some higher lows.

This is the deepest lower low, the main area that you should wait for.

We have the liquidity clearout and the quick reversal after clearout.

But now the question is, where’s our entry?

This isn’t so clear like in a symmetrical structure.

That’s why I prefer the symmetrical ones.

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