Liquidity in trading is a reference to the cash available in the market, and exists as entries and exits—hence, stop-loss orders, buy stops, and sell stops. By understanding the psychology that defines the behavior of traders and how liquidity is arranged, traders can position themselves to exploit such pools.
Liquidity is not a matter of tracking money flows but the recognition of where traders are placing their stop losses and order blocks. These areas are liquidity pools and become targets for price action during certain market conditions. Understanding the types of liquidity can significantly improve your trading edge.
The Four Types of Liquidity You Must Know
1. Relative Equal Highs and Lows
Relative equal highs or lows is the first type of liquidity. These happen to be points where most traders put in their stop losses. For instance, as price declines, many traders will short the market and place stop losses at highs. Such stop losses form a liquidity pool that movements in the market can hit.
In simple terms, liquidity is a group of stop-losses clustered around logical price levels. Traders usually place stop losses at highs or lows, which makes these points crucial in identifying liquidity zones. By focusing on these levels, traders can plan entries and exits more effectively.
2. Previous Highs and Lows
The previous highs and lows also represent critical liquidity pools. Traders buy near a breakout point and place stop losses underneath the previous low because the market tends to trend in that direction. These levels, therefore, carry meaningful liquidity that the market may target to clear before making a reversal or continuing in the direction of the trend.
Traders pay much attention to these levels because of their predictability. At the old high or low, traders tend to break into the market when a breach occurs. They place stop-loss orders for themselves at the appropriate levels. Knowing these liquidity points helps traders put their trades into context.
3. Session Highs and Lows
Yet another important form of liquidity are session highs and lows. For example, during the Asian session, the range from the highest to the lowest price level forms a liquidity pool. This liquidity is widely swept in the London session because market participants will try to take advantage of such areas before a reversal takes place.
Knowing how to frame trades around session highs and lows—such as the Asian session highs before the London open—can provide higher probability setups. The market tends to move in cycles, with one session’s highs and lows serving as liquidity for the next. This predictable pattern allows traders to develop more reliable strategies.
4. Previous Day Highs and Lows
The previous day’s high and low are some of the most significant liquidity zones when trading. Sometimes, these levels can be decisive in setting up high-probability trade configurations. Frequently, price action will break through the previous day’s high or low as market conditions evolve to expansion, contraction, or a range.
Understanding how important previous day liquidity is helps traders position themselves to enter trades when price hits these levels. With the presence of the trend, traders can maximize the entry of trades.
How to Frame Trade Setups Using Liquidity
Effective use of liquidity requires understanding the structure of the markets and what is happening with price action. With liquidity zones such as session highs, lows, and relative equal highs and lows, you can start to map out a plan based on the price reactions within those zones.
First observe the prevailing trend in the market structure. Is it a trending market, consolidation market, or reversing? The pools of liquidity best get leveraged using prevailing trends of the market. Take for example; the market is downward trending; sweep out for liquidation opportunities. Those include former day high/low from where during reversal sweep-out. Main strategy is: Liquidity Run
One of the strongest liquidity trading models is the “run of liquidity” model. You wait for the market to run past certain zones of liquidity, such as the session’s highs or lows or yesterday’s highs and lows, then get into the market with a directional trade. If the market sweeps through the London open highs, for example, you might wait for a reversal when the liquidity clears.
Practical Examples from the ICT Liquidity Video
Let’s take a closer look at how liquidity works in real market scenarios. The trainer discusses sessions ranges and previous day highs and lows in the ICT video by walking through examples of charts. Observing how a price reacts through marking these liquidity zones can be a great way that leads to developing more accurate and profitable strategies for traders.
For example, when price moves through session highs and lows in the Asia session, one commonly observes a sweep of liquidity. This means that on the reversal from London, it may have price sweeping through the Asia session highs or lows before it continues in the direction of the overall trend. Knowing these patterns can greatly help a trader improve his ability to catch profitable moves.
Using Market Structure Combined with Liquidity
Market structure is the most important factor when trading liquidity. Once you’ve identified a liquidity pool, it’s vital to assess the overall market structure to understand where price is likely to head. For example, if the market is in a strong downtrend, liquidity levels above the current price—such as the previous day highs or session highs—may be swept before the market continues lower.
The market structure is helpful in confirming the probability of a liquidity sweep and finding the proper entry point for a trade.Market structure analysis, when combined with liquidity identification, greatly improves the chances of success in trading. Liquidity is a very basic concept every trader needs to understand to become successful in the markets. A trader can better build more accurate and profitable trade setups by identifying key liquidity zones, which include relative equal highs, previous session highs and lows, and daily liquidity levels.
A mix of technical analysis, market psychology, and how liquidity flows through the market are what it takes to include liquidity in your trading strategy. Through these concepts, you’ll position yourself for some very high-probability trading opportunities.
Following the insights provided in this ICT liquidity video and applying them to your trading strategy will get you on the road to improving your trading performance and capturing more consistent profits.
