Liquidity Part Two - Highest Probability Liquidity Pools
Session Liquidity
Price often reacts strongly to previous session highs and lows.
Major highs and lows of each session contain significant liquidity.
Examples:
Asian session: Major high and low.
London session: Sweeps Asia highs, may trade to Asia lows.
New York session: Targets London highs or lows as external liquidity.
Indicator: ICT Kill Zones and Pivot marks out sessions and their highs and lows.
Stop losses often placed at session highs (shorts) and lows (longs).
Expect rejection when previous session trades to these highs or lows.
Price action typically involves rebalancing ranges or seeking liquidity.
Price often runs from one session high to another session low or vice versa.
Understanding session highs and lows helps determine daily bias.
Example: If London highs are swept, expect price to trade to London lows during the New York session.
New York PM session liquidity is found at previous sessions (lunch hour, New York AM session) highs and lows.
Goal: Find the next draw on liquidity for high-probability trades.
Example: London session takes out Asia highs, look for shorts to Asia lows.
After the New York session, extreme highs and lows are created (New York AM high, New York AM low). Price often takes out New York session AM low and then runs to New York AM session high.
The Key takeaway is to refer to previous session highs and lows to find the next draw on liquidity.
Importance of Reaction from Highs/Lows
Sweeping a high or low doesn't guarantee a trade back to the other side of the range.
However, expect a reaction.
If price displaces through a session low without reaction, expect continued movement in that direction instead of trading back to the previous session high.
Understanding liquidity pools at session highs/lows helps identify whether price will react/reverse or continue in the same direction.
Previous Day High and Low (PDH/PDL)
Previous day high and previous day low are significant draws on liquidity.
Find them on the daily candle: the high and low of the previous day's candle.
Previous Day High (PDH): The highest point price traded to on the previous day.
Previous Day Low (PDL): The lowest point price traded to on the previous day.
Helps determine daily bias and the direction the daily candle is expanding towards.
Liquidity pools are areas where price can:
Go to.
React off of and trade in the opposite direction.
Example: bullish structure towards PDH, take longs, then react off PDH and form bearish structure, shorts become valid.
Mark out PDH/PDL every morning to know the trading range.
PDH/PDL serve as external liquidity points.
They shouldn't be primary take-profit (TP) targets.
First TP should be internal liquidity.
Like all liquidity pools, PDH/PDL doesn't necessarily need to be traded to.
Look for structure to validate bias towards the draw on liquidity.
Low Resistance Liquidity (LRL)
Also known as trendline liquidity or failure swings.
Trendline liquidity occurs where a line can be drawn resembling a trendline.
Failure swings: not taking the recent low.
Books often teach to trade based on trendlines, but this is often incorrect.
Stop losses are placed at these swings (failure swings).
In bullish order flow, LRL generates sell-side liquidity where price continues to run higher, failing to take out the previous low.
In bearish order flow, trendline liquidity generates buy-side liquidity, we can mark out this trendline liquidity and see that amongst all these failure swings.
Trendline = Buy-side Liquidity.
On the charts, bullish LRL occurs when failure swings are made, meaning each swing high fails to take out the previous swing high.
Example: stop losses are rested at every single swing point and those stop losses aren't getting taken; they just keep getting generated.Such clustered stop losses create generated liquidity.
Market often takes out these stop losses rapidly.
Look for bunched-up highs or lows to identify LRL.
Before running LRL, price may sweep sell-side liquidity.
LRL is an obvious draw on liquidity, especially on lower time frames.
Trading strategy: target LRL if you can spot it.
Think of LRL as a cluster of stop losses ready to be triggered.
Bearish Low Resistance Liquidity
Trendline liquidity where each swing low fails to take out the previous swing low, forming higher lows.
Stop losses accumulate at these higher lows.
After rejecting a bearish fair value gap (FVG), price may run through these lows.
Identifying LRL aids in determining bias.
Market is likely drawing towards where LRL is generated because it's a cluster of stop losses.
Equal Highs and Equal Lows (EQH/EQL)
Highs and lows printed at the same exact price point.
Equal highs/lows are at the exact same price points, regardless of candle color.
Books teach:
Equal highs act as resistance, short them with stop losses above.
Equal lows act as support, long them with stop losses below
This creates a great liquidity pool for smart money traders to target.
More equal highs/lows occur on ES, but the liquidity pools aren't as prominent as on NQ.
Trading Equal Highs and Lows
NQ has fewer but more significant equal highs/lows due to its higher volatility.
Focus on NQ for trading equal highs/lows.
Indicator: Equal Highs Lows by Jay Zer.
ES has more equal highs/lows due to lower volatility.
Equal highs/lows on ES are less reliable as liquidity pools.
When created on NQ and ES, you can anticipate those to be way more prominent liquidity pools. You can expect price to trade to those levels, to react from those levels in comparison to ES, where they're just really another swing high or swing low or another random set of equal highs and equal lows.
Additional Considerations
Equal highs/lows formed from two major swings apart hold more power as a liquidity pool than those close together.
Data Wicks
Data wicks occur during news events.
Refer to Forex Factory for high-impact news times.
High-impact news (red folder) creates volatile candles with data highs and lows.
These highs and lows serve as prominent liquidity pools.
Price often sweeps one range and then trades to the opposite range after news drops (e.g., CPI).
Data wicks are great confluence for inversion models (to be discussed later).
Mark out data highs/lows during red-folder news.
Data wicks represent market imbalances.
Large wicks indicate unfilled orders, which price tends to revisit.
Ensure volatile wicks are actually caused by news events before marking them as data highs/lows.
Example: on NFP (non-farm employment change) days (high-impact event), mark the data high and data low created.
Wait for one range to be taken out, then target the opposite range.
After the news, for example, after 8:30 you can anticipate shorts down to data lows.
Identify these data levels, wait for the sweep of a high or low, and look for entry opportunities toward the level that hasn't been taken yet.
Unfilled Fair Value Gaps (FVG) / Internal Range Liquidity (IRL)
Market moves from internal range liquidity to external range liquidity.
External range liquidity: buy-side and sell-side liquidity at major swing highs/lows.
Internal range liquidity gets us to external range liquidity pools.
Unfilled fair value gaps represents the internal range liquidity.
Market trades towards these gaps to fill orders.
Bullish scenario: external range liquidity - internal range liquidity (bullish fair value gap) - external range liquidity, in that order.
Same with the bearish sense: external range liquidity, then trade higher into bearish fair value gap (internal range liquidity) to then trade back lower to the external range liquidity.
Chart Examples
Unfilled bullish fair value gaps (imbalances/IRL) exist below external range liquidity (buy-side liquidity).
After taking buy-side liquidity, price rebalances towards these unfilled fair value gaps.
Price trades into these gaps, propelling it towards the external range of liquidity. This is external range liquidity.
Market moves via unfilled fair value gaps to buy-side/sell-side external range liquidity until a shift in structure occurs.
In bullish structure, lots of sell-side is generated, while in bearish structure, lots of buy-side is generated; maintain bullish/bearish order flow by trading back towards internal liquidity.
With bullish price action, every single time that its making moves up, it is trading back towards internal liquidity, these unfilled gaps.
Trading Strategy
When longing in bullish order flow, wait for price to hit internal liquidity before executing a long trade.
Avoid longing at peaks; wait for price to trade back towards internal liquidity and then target external liquidity.
Devil's Mark
Also known as a wickless candle.
Most candles have wicks on top and bottom.
Devil's mark: candle fails to print a wick (imbalance in price).
In bullish movement, open low without wicking and open high.
If failure to print that open low, the candle creates that open high.
Trading the Devil's Mark
Focus on higher time frames for devil's marks due to their better reliability as liquidity pools.
If an hourly candle fails to make a wick, expect price to eventually trade back to that level and correct the imbalance.
Price trades away from the devil's mark and adds the wick later.
Example: Hourly candle creates an open low without a high (11:00 devil's mark); price trades away then returns to print the wick.
Like all concepts, use devil's marks with other confluences.
Wait for a sell-side sweep before longing towards a devil's mark.
Example: price sweeps sell-side, then delivers up to the 11:00 a.m. devil's mark when is paired with fair value gaps.
Combining Liquidity Concepts
Imagine this is current price action where The New York AM session delivers to say London lows.
Price sweeps London lows.
Then you identify low resistance liquidity, and a buy-side level above, an unfilled gap, equal highs all at this level. And it becomes an opportunity to long.
If in bearish order flow, but ending up hitting some sort of bullish pay, you sweep some sell-side liquidity, now you can look for longs because you know there's actually a reason for price to deliver in this direction.
Wait for validation of longs, such as a bullish fair value gap being created and respected.
Then, execute longs targeting LRL, buy-side, and equal highs which gives you an amazing 10 TP's.
Conclusion
Pair all concepts together to build understanding.
Analyze charts and tape read to understand price movement and reactions.
Identify liquidity pools to anticipate the next draw on liquidity.
Homework: find and mark LRL, unfilled gaps, equal highs/lows, data highs/lows, session liquidity on charts.
Trading is a language; invest time in analysis to understand it.
Greatness won't occur overnight; analysis will eventually click into place.
High conviction biases come from proper market understanding.
Session Liquidity
Price often reacts strongly to previous session highs and lows because these levels represent significant points where buy and sell orders have accumulated. Understanding these reactions can provide insights into potential trading opportunities.
Major highs and lows of each session contain significant liquidity, as they are key areas where traders place their stop losses, take profit orders, and new positions. These levels act as magnets for price action.
Examples:
Asian session: Identify the major high and low to gauge potential breakout or reversal levels.
London session: Often sweeps Asia highs to trigger stop losses and generate momentum. It may also trade down to Asia lows before reversing.
New York session: Commonly targets London highs or lows as external liquidity, seeking to capitalize on orders accumulated during the London session.
Indicator: ICT Kill Zones and Pivot mark out sessions and their highs and lows, helping traders visualize key levels and plan their trades accordingly.
Stop losses are often placed at session highs (for short positions) and lows (for long positions), making these levels attractive targets for liquidity sweeps.
Expect rejection when the previous session trades to these highs or lows, indicating potential reversals or continuation patterns.
Price action typically involves rebalancing ranges or seeking liquidity to fill orders and establish a directional bias.
Price often runs from one session high to another session low or vice versa, leveraging available liquidity to facilitate movement.
Understanding session highs and lows helps determine daily bias and anticipate potential price movements.
Example: If London highs are swept, expect price to trade to London lows during the New York session, suggesting a bearish outlook for that day.
New York PM session liquidity is often found at previous sessions' (lunch hour, New York AM session) highs and lows.
Goal: Find the next draw on liquidity for high-probability trades by identifying key levels and anticipating where price is likely to move next.
Example: London session takes out Asia highs, look for short opportunities targeting Asia lows as the next likely destination.
After the New York session, extreme highs and lows are created (New York AM high, New York AM low). Price often takes out New York session AM low and then runs to New York AM session high, indicating a potential trading range for the next session.
Key takeaway: Refer to previous session highs and lows to find the next draw on liquidity, using these levels as guideposts for potential trades.
Importance of Reaction from Highs/Lows
Sweeping a high or low doesn't guarantee a trade back to the other side of the range, but it often induces a reaction as traders adjust positions.
However, expect a reaction. Monitor price action closely to confirm potential reversals or continuations.
If price displaces through a session low without reaction, expect continued movement in that direction instead of trading back to the previous session high, indicating strong momentum.
Understanding liquidity pools at session highs/lows helps identify whether price will react/reverse or continue in the same direction, facilitating better decision-making.
Previous Day High and Low (PDH/PDL)
Previous day high and previous day low are significant draws on liquidity because they represent the highest and lowest points of the previous trading day, where many orders are clustered.
Find them on the daily candle: the high and low of the previous day's candle serve as reference points for current trading strategies.
Previous Day High (PDH): The highest point price traded to on the previous day, acting as a potential resistance level.
Previous Day Low (PDL): The lowest point price traded to on the previous day, acting as a potential support level.
Helps determine daily bias and the direction the daily candle is expanding towards. Analyzing PDH and PDL can provide insights into the overall trend for the current day.
Liquidity pools are areas where price can:
Go to, attracting price towards these levels due to order accumulation.
React off of and trade in the opposite direction, indicating potential reversals.
Example: bullish structure towards PDH, take longs, then react off PDH and form bearish structure, shorts become valid.
Mark out PDH/PDL every morning to know the trading range and potential areas of interest for trading.
PDH/PDL serve as external liquidity points. These levels are often targeted to trigger stop losses or initiate new positions.
They shouldn't be primary take-profit (TP) targets; instead, use them as reference points for managing trades.
First TP should be internal liquidity, such as unfilled fair value gaps or other internal levels within the range.
Like all liquidity pools, PDH/PDL doesn't necessarily need to be traded to, but they often exert influence on price action.
Look for structure to validate bias towards the draw on liquidity. Confirm directional bias with chart patterns and indicators.
Low Resistance Liquidity (LRL)
Also known as trendline liquidity or failure swings, representing areas where price is likely to move due to accumulated stop losses.
Trendline liquidity occurs where a line can be drawn resembling a trendline. This is often targeted by institutional traders.
Failure swings: not taking the recent low, creating a buildup of potential orders.
Books often teach to trade based on trendlines, but this is often incorrect. Institutional traders often use these areas to trigger stop losses and generate liquidity.
Stop losses are placed at these swings (failure swings), making them attractive targets for manipulation.
In bullish order flow, LRL generates sell-side liquidity where price continues to run higher, failing to take out the previous low. This entices traders to place short positions, which are then targeted.
In bearish order flow, trendline liquidity generates buy-side liquidity. We can mark out this trendline liquidity and see that amongst all these failure swings.
Trendline = Buy-side Liquidity. Areas where buy orders accumulate, attracting bearish movements.
On the charts, bullish LRL occurs when failure swings are made, meaning each swing high fails to take out the previous swing high.
Example: stop losses are rested at every single swing point and those stop losses aren't getting taken; they just keep getting generated.
Such clustered stop losses create generated liquidity, making these areas prime targets for institutional traders.
Market often takes out these stop losses rapidly, resulting in quick and decisive price movements.
Look for bunched-up highs or lows to identify LRL, indicating areas of significant order accumulation.
Before running LRL, price may sweep sell-side liquidity to induce additional short positions and maximize the impact.
LRL is an obvious draw on liquidity, especially on lower time frames, making it a key area to watch for potential trades.
Trading strategy: target LRL if you can spot it. Identify these areas and anticipate potential breakouts or breakdowns.
Think of LRL as a cluster of stop losses ready to be triggered, offering opportunities for strategic entries.
Bearish Low Resistance Liquidity
Trendline liquidity where each swing low fails to take out the previous swing low, forming higher lows. This is a classic setup for bearish movements.
Stop losses accumulate at these higher lows, creating a pool of potential liquidity for savvy traders.
After rejecting a bearish fair value gap (FVG), price may run through these lows, capitalizing on the built-up orders.
Identifying LRL aids in determining bias. By recognizing these patterns, traders can better anticipate market direction.
Market is likely drawing towards where LRL is generated because it's a cluster of stop losses, attracting price towards these levels.
Equal Highs and Equal Lows (EQH/EQL)
Highs and lows printed at the same exact price point, indicating significant levels of agreement among traders.
Equal highs/lows are at the exact same price points, regardless of candle color, making them easily identifiable on charts.
Books teach:
Equal highs act as resistance, short them with stop losses above. Retail traders often follow such strategies, creating predictable patterns.
Equal lows act as support, long them with stop losses below. Similar to equal highs, these setups are well-known and frequently exploited.
This creates a great liquidity pool for smart money traders to target. By anticipating these movements, smart money traders can profit from the predictable behavior of retail traders.
More equal highs/lows occur on ES, but the liquidity pools aren't as prominent as on NQ. The higher volatility of NQ makes its equal highs/lows more significant.
Trading Equal Highs and Lows
NQ has fewer but more significant equal highs/lows due to its higher volatility, leading to more decisive price action.
Focus on NQ for trading equal highs/lows. The greater volatility and order flow make these levels more reliable.
Indicator: Equal Highs Lows by Jay Zer, which helps identify these levels on charts.
ES has more equal highs/lows due to lower volatility, resulting in less reliable signals.
Equal highs/lows on ES are less reliable as liquidity pools. Their impact on price action is generally weaker compared to NQ.
When created on NQ and ES, you can anticipate those to be way more prominent liquidity pools. You can expect price to trade to those levels, to react from those levels in comparison to ES, where they're just really another swing high or swing low or another random set of equal highs and equal lows.
Additional Considerations
Equal highs/lows formed from two major swings apart hold more power as a liquidity pool than those close together, indicating greater significance.
Data Wicks
Data wicks occur during news events, which introduce high volatility and potential trading opportunities.
Refer to Forex Factory for high-impact news times to stay informed about important economic releases.
High-impact news (red folder) creates volatile candles with data highs and lows, which serve as key reference points.
These highs and lows serve as prominent liquidity pools, attracting significant trading activity.
Price often sweeps one range and then trades to the opposite range after news drops (e.g., CPI), creating opportunities for quick profits.
Data wicks are great confluence for inversion models (to be discussed later), adding another layer of confirmation to trading strategies.
Mark out data highs/lows during red-folder news to identify potential entry and exit points.
Data wicks represent market imbalances, reflecting situations where supply and demand are not in equilibrium.
Large wicks indicate unfilled orders, which price tends to revisit, offering opportunities to capitalize on these imbalances.
Ensure volatile wicks are actually caused by news events before marking them as data highs/lows to avoid false signals.
Example: on NFP (non-farm employment change) days (high-impact event), mark the data high and data low created to monitor potential price movements.
Wait for one range to be taken out, then target the opposite range, capitalizing on the expected reversal.
After the news, for example, after 8:30 you can anticipate shorts down to data lows, based on the initial reaction.
Identify these data levels, wait for the sweep of a high or low, and look for entry opportunities toward the level that hasn't been taken yet.
Unfilled Fair Value Gaps (FVG) / Internal Range Liquidity (IRL)
Market moves from internal range liquidity to external range liquidity, reflecting the natural flow of capital.
External range liquidity: buy-side and sell-side liquidity at major swing highs/lows.
- Internal range liquidity gets us to external range liquidity pools.
Unfilled fair value gaps represents the internal range liquidity, acting as magnets for price action.
Market trades towards these gaps to fill orders, restoring equilibrium and creating opportunities.
Bullish scenario: external range liquidity - internal range liquidity (bullish fair value gap) - external range liquidity, in that order. This sequence often leads to sustained bullish movements.
Same with the bearish sense: external range liquidity, then trade higher into bearish fair value gap (internal range liquidity) to then trade back lower to the external range liquidity. This pattern often indicates a strong bearish trend.
Chart Examples
Unfilled bullish fair value gaps (imbalances/IRL) exist below external range liquidity (buy-side liquidity). These gaps attract price and often lead to bullish continuations.
After taking buy-side liquidity, price rebalances towards these unfilled fair value gaps, restoring market equilibrium.
Price trades into these gaps, propelling it towards the external range of liquidity. This is external range liquidity, where the cycle repeats.
Market moves via unfilled fair value gaps to buy-side/sell-side external range liquidity until a shift in structure occurs. This pattern persists until a significant change in market sentiment.
In bullish structure, lots of sell-side is generated, while in bearish structure, lots of buy-side is generated; maintain bullish/bearish order flow by trading back towards internal liquidity. This helps sustain the prevailing trend.
With bullish price action, every single time that its making moves up, it is trading back towards internal liquidity, these unfilled gaps.
Trading Strategy
When longing in bullish order flow, wait for price to hit internal liquidity before executing a long trade. This increases the probability of success.
Avoid longing at peaks; wait for price to trade back towards internal liquidity and then target external liquidity. This strategy enhances risk management and potential rewards.
Devil's Mark
Also known as a wickless candle, representing an imbalance in price action.
Most candles have wicks on top and bottom, indicating price exploration in both directions.
Devil's mark: candle fails to print a wick (imbalance in price), suggesting strong directional momentum.
In bullish movement, open low without wicking and open high, indicating a lack of resistance to upward movement.
If failure to print that open low, the candle creates that open high, further emphasizing the imbalance.
Trading the Devil's Mark
Focus on higher time frames for devil's marks due to their better reliability as liquidity pools, making them more significant.
If an hourly candle fails to make a wick, expect price to eventually trade back to that level and correct the imbalance, offering trading opportunities.
Price trades away from the devil's mark and adds the wick later, completing the price action and restoring equilibrium.
Example: Hourly candle creates an open low without a high (11:00 devil's mark); price trades away then returns to print the wick, fulfilling the expected pattern.
Like all concepts, use devil's marks with other confluences, enhancing the probability of successful trades.
Wait for a sell-side sweep before longing towards a devil's mark. This adds confirmation and increases the likelihood of a profitable trade.
Example: price sweeps sell-side, then delivers up to the 11:00 a.m. devil's mark when is paired with fair value gaps, creating a high-probability setup.
Combining Liquidity Concepts
Imagine this is current price action where The New York AM session delivers to say London lows.
Price sweeps London lows, creating a potential entry point.
Then you identify low resistance liquidity, and a buy-side level above, an unfilled gap, equal highs all at this level. And it becomes an opportunity to long, capitalizing on multiple factors.
If in bearish order flow, but ending up hitting some sort of bullish pay, you sweep some sell-side liquidity, now you can look for longs because you know there's actually a reason for price to deliver in this direction, increasing confidence in the trade.
Wait for validation of longs, such as a bullish fair value gap being created and respected, confirming the potential upward movement.
Then, execute longs targeting LRL, buy-side, and equal highs which gives you an amazing 10 TP's, maximizing potential profits.
Conclusion
Pair all concepts together to build understanding. Holistic analysis is key to successful trading.
Analyze charts and tape read to understand price movement and reactions, enhancing intuition and decision-making.
Identify liquidity pools to anticipate the next draw on liquidity, predicting potential price movements.
Homework: find and mark LRL, unfilled gaps, equal highs/lows, data highs/lows, session liquidity on charts to reinforce learning.
Trading is a language; invest time in analysis to understand it. The more time spent analyzing the markets, the better the understanding.
Greatness won't occur overnight; analysis will eventually click into place. Consistency and dedication are essential for success.
High conviction biases come from proper market understanding, leading to more confident and profitable trading decisions.