Liquidity as the Key to understanding the Market
Updated
Liquidity in the market is a key factor in price movement especially in the cryptocurrency market. Understanding how and where liquidity appears is fundamental to being able to determine the future price movement of an asset.
Liquidity:
I would like to start by showing what liquidity is and how it can be detected.
In our case, liquidity is the accumulation of buy or sell orders, and the more of them there are, the greater the opportunity to turn a currency into an asset and vice versa.
According to technical analysis, an asset has so-called price levels from which further downward or upward movement occurs. Exactly from these levels on the chart, which are seen by all traders without exception, trades are opened, and stop-losses are set for the nearest minimum or maximum. Thus, liquidity is accumulated behind the levels, which acts as a magnet for the price as it is of great interest for big players to fill their orders.
90 percent of traders' stop losses are very close to each other, therefore, with a significant force of price movement in one direction and subsequent interaction with the level of support or resistance, positions are liquidated and a sharp purchase or sale of an asset at stop losses occurs.
Please pay attention to the main point. Liquidity is a tool for price movement used by big players. Always keep this in mind.
Gap:
A gap is a result of low liquidity in the market and a high trading volume of the stock. Gaps are important for technical analysis because they signal shifts in the supply and demand equilibrium. Major gaps indicate a substantial imbalance between buyers and sellers, causing a swift repricing.
It is always important to remember that gaps are visible to every market participant and many people when a gap appears start opening trades directed towards its filling thus provoking the emergence of liquidity. In turn, this can lead the price in the opposite direction to the one where the gap is located in order to liquidate recently opened positions of cunning traders. But as a rule, the price eventually comes to the gap and fills it partially or completely removing inefficient pricing. You can think of it as a magnet for price.
Fair Volume Gap:
FVG (Fair Volume Gap) has the same meaning as a gap (i.e. a magnet for price) but not all traders are focused on this kind of inefficient pricing. In this case it is also significant that according to the common technical analysis the level of 0.5 major candles is used as a strong level of support and resistance and therefore liquidity will be near these levels. Thus FVG filling is achieved also at the expense of ordinary traders buying or selling from these levels.
Luquidity pools:
It is also worth mentioning the so-called liquidity pools. These are often staggered liquidity clasters combined with zones of inefficient pricing, which together lead to very significant and rapid price movements.
Let's look at the essence of this by the example of how a sharp upward growth occurs. Gradually, a major player moves the price down, leaving liquidity on top and not touching it at all, since we will still need it. When long positions are sufficiently liquidated, we can start collecting liquidity from above. And since this liquidity has not been affected at all, sharp liquidation of short positions level by level occurs. It is worth noting the significant impact of inefficient pricing zones through which the asset, as if accelerating faster, reaches clusters of liquidations and, accordingly, a very rapid growth of the asset occurs.
These are the basics that I hope will help you improve your trading.
I plan to continue developing the topics of liquidity, pricing and the principles of determining price movements. What do you think about it?
Liquidity:
I would like to start by showing what liquidity is and how it can be detected.
In our case, liquidity is the accumulation of buy or sell orders, and the more of them there are, the greater the opportunity to turn a currency into an asset and vice versa.
According to technical analysis, an asset has so-called price levels from which further downward or upward movement occurs. Exactly from these levels on the chart, which are seen by all traders without exception, trades are opened, and stop-losses are set for the nearest minimum or maximum. Thus, liquidity is accumulated behind the levels, which acts as a magnet for the price as it is of great interest for big players to fill their orders.
90 percent of traders' stop losses are very close to each other, therefore, with a significant force of price movement in one direction and subsequent interaction with the level of support or resistance, positions are liquidated and a sharp purchase or sale of an asset at stop losses occurs.
Please pay attention to the main point. Liquidity is a tool for price movement used by big players. Always keep this in mind.
Gap:
A gap is a result of low liquidity in the market and a high trading volume of the stock. Gaps are important for technical analysis because they signal shifts in the supply and demand equilibrium. Major gaps indicate a substantial imbalance between buyers and sellers, causing a swift repricing.
It is always important to remember that gaps are visible to every market participant and many people when a gap appears start opening trades directed towards its filling thus provoking the emergence of liquidity. In turn, this can lead the price in the opposite direction to the one where the gap is located in order to liquidate recently opened positions of cunning traders. But as a rule, the price eventually comes to the gap and fills it partially or completely removing inefficient pricing. You can think of it as a magnet for price.
Fair Volume Gap:
FVG (Fair Volume Gap) has the same meaning as a gap (i.e. a magnet for price) but not all traders are focused on this kind of inefficient pricing. In this case it is also significant that according to the common technical analysis the level of 0.5 major candles is used as a strong level of support and resistance and therefore liquidity will be near these levels. Thus FVG filling is achieved also at the expense of ordinary traders buying or selling from these levels.
Luquidity pools:
It is also worth mentioning the so-called liquidity pools. These are often staggered liquidity clasters combined with zones of inefficient pricing, which together lead to very significant and rapid price movements.
Let's look at the essence of this by the example of how a sharp upward growth occurs. Gradually, a major player moves the price down, leaving liquidity on top and not touching it at all, since we will still need it. When long positions are sufficiently liquidated, we can start collecting liquidity from above. And since this liquidity has not been affected at all, sharp liquidation of short positions level by level occurs. It is worth noting the significant impact of inefficient pricing zones through which the asset, as if accelerating faster, reaches clusters of liquidations and, accordingly, a very rapid growth of the asset occurs.
These are the basics that I hope will help you improve your trading.
I plan to continue developing the topics of liquidity, pricing and the principles of determining price movements. What do you think about it?
Trade active
A great example of using liquidity is the etherium chart. A small withdrawal of liquidity from the top and accumulation of liquidity from the bottom followed by liquidation of long positions leads us to a large position accumulation by a large player who further sends the price up and makes a breakout. Always watch out for price manipulation. The price will most likely go from the level near which there are more price manipulations and squeezes.
Trade active
A great example of using the gap in the January asset repositioning. Big players used the gap as a magnet to open traders' short positions and eventually created all the conditions for additional acquisition of the asset by liquidating long positionsTrade active
Here is a clear example of how the market is constructed by price movement. At the first stage Fair value gaps and untouched liquidity are formed creating so-called liquidity pools. At the second stage there is a gradual breakthrough of liquidity accumulation levels and in parallel liquidity is formed by opening long positions. These long positions will soon also be broken down by a vigorous movement. The main rule is to keep an eye on the side from which the lows and highs are not updated, respectively, it is there that liquidity will accumulate, which will serve as a magnet for the price in the future.
Trade active
Another clear example of how long positions opened in the direction of gap closure are liquidated.Then there is an accumulation of liquidity to accumulate energy to close the gap and as a consequence a rapid growth in priceNote
The most important thing is to pay attention to long candles that create emptiness in the market, as well as on which side liquidity is accumulating and on which side it is being eaten up.
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