LIQUIDUTY BASED
ENTRY DRILLS
Liquidity
Liquidity simply put is the "fuel" of the
market. We can see liquidity as the driving
force of the market: it exists everywhere
and the market is always gravitating
towards areas of liquidity for different
reasons.
Liquidity is just money in the market. This
money comes mainly from stop losses
that people will use.
This guide was written to help those who
struggle with understanding and using
liquidity in their own trading.
How to identify liquidity?
Liquidity exists everywhere. Above and below
every high - everywhere. Therefore, as traders we
must be aware of where large pools of liquidity
exist in the market.
But how do we identify these areas?
The answer lies in some basic terminology that
many of you have seen before.
Large areas of liquidity exists under equal, or
relatively equal lows and highs, above and below
trendlines, and single highs and lows themselves.
Let's take a deeper, more visual look.
Liquidity Models
One of the most well-known, highly used
and spoken about methods of trading is
the famous trendline. People often
buy/sell of the "touches" of the
"trendline". This therefore results in very
many stop losses above/below the
trendline, and this means massive
liquidity pools near the trendline.
The next two types of liquidity pools fall
hand in hand with each other, and are
known as the infamous "support" and
"resistance" lines, or levels. These are
used in a very simple, but naïve and
uninformed way.
Examples
How do we use these models
to our advantage?
First, we must be familiar with the models
and patterns shown previously, and
identifying them at, or near our POIs is a
great way to start.
Simply put, the market will engineer
liquidity, at or near a POI (point of
interest) and will almost always produce
those "resistance/support levels" and/or
"trendlines". Our job is to find the areas in
the market where price sweeps this
liquidity so we can get involved. This is
one part of the entry drill, and can be
referred to as a purge, or sweep of
liquidity, or a liquidation.
Above is a very typical bullish entry model,
known as an accumulation schematic.
We see the market "slow down" and
engineer liquidity in the form of equal lows
(shown in the red line). Then we see an
aggressive sweep of this liquidity before an
entry can be taken.
The important thing to note here is that we
must wait for a clear sweep and we trade
away from this sweep, in the opposite
direction.
A liquidity sweep is very often aggressive,
fast and high volume in nature.
Above is a very typical bearish entry model, known
as a distribution schematic.
We see the market "slow down" and engineer
liquidity in the form of equal highs (shown in the
red line). Then we see an aggressive sweep of this
liquidity before an entry can be taken.
The important thing to note here is that we must
wait for a clear sweep and we trade away from this
sweep, in the opposite direction.
A liquidity sweep is very often aggressive, fast and
high volume in nature.
The same principles apply to trendlines too
This is our first example (8th June 2022). Notice how price
slows down, meaning the buying pressure has decreased
upon mitigation of the higher time frame POI. We then see a
very clear formation of equal highs (marked using LQ). We
then see a wick above these highs as the liquidity sweep
before a sell trade can be taken.
Here we see the market create a very clear "resistance" level:
we wait for this liquidity pool to be swept before we enter,
and of course we trade away from the sweep.
We then can see a trendline formation below, which we can
use as our first target, and of course this is because the
market just moves from one liquidity pool to the next.
The exact same principles apply with a bullish
entry drill, it is just the opposite way around.
Notice the slow down in price, as selling pressure
decreases. The market starts engineering equal
lows (marked with LQ).
After the formation of these equal lows, we get a
fast aggressive sweep of liquidity, and then we get
our desired buy trade.
Internal vs External Range Liquidity
What is the difference ?
For us here, internal range
liquidity is referred to as
the pools of liquidity that
exist "inside" the structural
price range.
External range liquidity are
pools of liquidity that exist
"outside" the structural
price range.
Let's take a close look.
Internal Range Liquidity
Internal range liquidity can be seen as pools of
liquidity that are within the price range, equal
highs/lows and trendlines are the main types of
internal range liquidity pools.
External Range Liquidity
Internal range liquidity can be seen as
pools of liquidity that are within the price
range, equal highs/lows and trendlines are
the main types of internal range liquidity
pools.
