Liquidity in Trading Explained Simply: What 95% Don't Know

[00:01] liquidity is? And most importantly, do you know how to trade this liquidity? You've definitely heard this word many times in the context that the price goes into the liquidity zone into the liquidity pool to remove this liquidity. Because many trading strategies

[00:15] that study candles, that is, Price Action. And Smart Money in particular, pay great attention to the concepts of liquidity because they believe that large capital or the market hunts for stop-losses themselves, ordinary retail traders, to come for

[00:30] these stop-losses themselves, take them and reverse the market, thus activating large price movements. Is this really so? Is

[00:43] or large capital really hunting for our stop-losses themselves? And most importantly, can we get a trading advantage using various tools that show this liquidity, for example, a liquidation map, heat maps, and others? This is what

[00:56] you will learn in this video and I am sure that it will essentially deepen the understanding of the market for experienced traders and open the eyes of beginners to what liquidity is, although you very often hear how other traders call stop-losses liquidity.

[01:09] In fact, liquidity is simply Placed limit orders in the order book stop losses I will analyze with specific examples a little later Now on the screen you see the available liquidity for the

[01:21] Bitcoin to Dollar trading pair on Binance for simplicity and better understanding I increased the grouping to $50 As you can see now there is a total As you can see now there is a total exchange of applications of 620 bitcoins who are

[01:33] ready to buy them at a price of $28.2 and 14 bitcoins who are ready to sell at a price of $28,250 You can think of these

[01:45] $28,250 You can think of these levels as a floor and a ceiling below and above the price since the price will not be able to rise above $50 now the price is 28,246 the price will not be able to rise Above this value or Above this value That

[02:00] is, until someone buys these 43 bitcoins the market will not be able to rise to the price of 28,250 just as until someone sells 611 bitcoins to buyers the market will not be able to fall to this price of 28,200 also Here you can see the pp Flow and

[02:17] also Here you can see the pp Flow and sales. In such an order book, you can see the aggression of buyers and sellers in each specific price range. That is, the strength of one or another is expressed in the

[02:31] difference between purchases and sales on the market. This is called the Delta of market volumes of order books, which is called the order book. You can see only limit orders. Treat limit orders as announcements,

[02:45] buy at this price or I want to sell at this price. Limit orders this price. Limit orders are placed and do not affect the price. They do not move the price. They create liquidity in the order book. Accordingly, the price is moved

[02:59] exclusively by market orders, which take this liquidity. Therefore, studying the delta of market volumes is an important component of market analysis, since it has the most direct impact on price movement. The market moves

[03:14] not because some line was drawn on the chart or because the indicator shows it. The market moves solely due to how strong the strength of market purchases or sales is at any given moment.

[03:28] Friends, I will not dwell on the topic of the Delta of market orders for long, because I have a long video on my channel where I have analyzed in great detail the practical application of this tool in trading. I highly recommend

[03:41] watching the tip you will see at the top of the screen. Let's now reinforce the topic of liquidity in orders. So, limit orders create liquidity in the order book, market orders take this liquidity. What you don't see in the order book is

[03:57] stop losses or liquidation prices. By default, they are executed exclusively by market orders on all exchanges. Popular services such as KF or Co GL that show liquidation maps are nothing more than an assumption

[04:13] based on previous price trends and data. What the resources themselves say, for example, Kingfisher writes that it seeks to predict where significant liquidations may occur, as well as

[04:30] trends, just as heat maps are only a forecast of the price level at which large-scale liquidation events may occur. Although such maps and services cue, but nothing more, it is important to understand that they do not have real data at a given

[04:45] point in time, which is available exclusively to the exchange on stop losses and liquidations of traders. This can be seen at the moment when it occurs. but not in advance, so it is not worth building your trading hypotheses based on the views of these services. King

[05:02] based on the views of these services. King F and GL display the liquidation levels as Assume the assessment I have already said about this obtained based on the change primarily of open interest and you can see on the chart that most of

[05:15] these levels are in very logical places, for example, above resistance or below support. It is much wiser to monitor how the price of an asset behaves on the levels of

[05:30] open interest, trading volume, market volume delta, order flow and other indicators that are really important for analysis, instead of trying to guess in advance where the price will go. The only way to see liquidations

[05:43] or the triggering of a large number of stop-loss orders is to analyze real facts during sharp price movements that can provoke cascading liquidations. They are characterized primarily by a sharp price movement and a

[05:58] significant decrease in open interest, as traders' positions are forcibly closed by exchanges because they do not have enough margin to maintain an open position. On the chart above, you see an example of such a cascading

[06:11] liquidation when, after a sideways movement, the price began to fall sharply. Long positions of traders with high leverage are immediately liquidated. This means that the exchange sells their positions into the order book with a market order, thereby increasing the

[06:27] selling pressure on the price. The price continues to fall, activating new stop-loss liquidations of traders who again sell their positions at the market, moving the price down, and this again and again, in turn, activates new stop-losses and

[06:41] liquidations of traders, and so on. This is called Cascade Liquidation. You can called Cascade Liquidation. You can see how about 100 million open interest was forcibly closed on this price movement. This is the total volume of

[06:55] closed Long and short positions. Open interest, or the sum of open positions, is one of the most important sources of data in cryptocurrency trading. What is open interest? New money is essentially

[07:09] cash flows. Its analysis shows the true volume of Long and short positions on the market at any given moment. Its analysis is necessary because the market is a two-way auction between buyers and sellers. Understanding market trends,

[07:24] each has more buyers than sellers. Who enters the market? Who exits? It is quite clear which side of the market will be easier and more profitable to deprive market will be easier and more profitable to deprive money of because if the market falls, shorts

[07:39] earn money at this moment, longs lose money if the market rises, those who Those who opened late short positions lose money, those who opened long positions earn money. By analyzing open interest at different points on the chart, you can understand

[07:52] which direction the market will be more profitable to make the next move in order to understand which side it will deprive of money. I will not dwell on open interest in detail now because this is a very, very broad topic

[08:04] that I discussed in detail in a separate video on my channel. You can see a hint in the upper right corner of the screen. We can also see how $500,000 of long positions were liquidated on this move. It is important

[08:18] to understand the difference between $100 million in closed positions and $ 500 real deposit liquidations. Often, are liquidity for the market with additional supply, since they

[08:32] provide an opportunity to fill positions for other traders. You can see that every time liquidations of more than $100,000 were made. Here you can see that they amounted to $145,000. A

[08:47] short-term local market reversal occurred, just like here, after the liquidation of here, after the liquidation of $228,000, the market turned around and bounced back around $228,000, the market turned around and bounced back around

[09:01] was also a rebound, just like here, just like here, the places where large liquidations occur can really potentially be very good turning points, and I often use this in my

[09:13] trading strategy, as well as with other elements of analysis that I told you about in detail. I discussed how to work with liquidations in a separate video on my channel. You already know where to look for a hint. Heat

[09:27] maps or HTM are another popular way to see liquidity for many traders, since they overlay limit orders from the order book on the chart, that is, the current order book is projected as such

[09:41] lines on the chart. Many traders look at large orders that are below at large orders that are below or above the price and think of them as whales that create support or resistance. In practice, this may turn out to be

[09:55] completely wrong, because you have to ask yourself why someone with large capital and a large position volume wants the entire market to completely calmly and freely see his true intention to buy or sell

[10:10] some asset. In many cases, these large limit orders in the order book are fake to confuse. Retail traders and create a false impression of the market, this is called spoofing. When the price gets closer to

[10:23] such a wall, it will simply be removed and this liquidity will disappear from the order book. This is so that many small traders who see this wall try to get ahead of it and begin to sell their positions, providing liquidity

[10:37] to the one who placed it. Now, in this example, you see one of these cases when a large wall was set for sale and you see how many retail traders are trying to get ahead of this wall before the price approaches it and begin to

[10:53] sell their positions here or open short positions after an additional position [music] reaklinik. Although sometimes such large orders can

[11:09] be real big whale purchases. Often, those who want to realize a large volume can do this over- the-counter, that is, contact the fund or the creator of the coin directly and conduct a transaction, as it is called, Under the

[11:22] and conduct a transaction, as it is called, Under the table or OTC transaction. Or, if he on the exchange, he will do it with an Iceberg order so that it is not visible in the order book. An Iceberg order is a

[11:36] large position that is broken down. into many small positions, that is, a large order is split into many close proximity to each other. For example, if someone wants to buy 100

[11:49] For example, if someone wants to buy 100 bitcoins at a price of $25,000, he will split this order into 100 orders for one bitcoin in increments of a few cents from each other. Now let's talk about liquidity pools. At the beginning of this

[12:03] strategies based on the analysis of Price Action candles, in particular the now popular Smart Money, pay great attention to finding these great attention to finding these liquidity pools. They are often called stop-losses, which is

[12:17] say this yourself because stop-losses are not technically liquidity since they are not visible to anyone and are not placed in the order book. Many people think that trading is magical when the price actually reaches this zone and

[12:33] reverses from it, and traders sincerely believe that this happened because a cunning market maker specifically came to knock out stop-losses that formed semi-liquidity for them. In fact, the truth

[12:46] behind these steps is hidden not in some secret manipulations And in the deep essence of the markets and the behavior of traders, all markets work on the principle of two-way auctions, which you saw at the beginning of this video. Although some

[13:00] movements beyond certain highs or lows trigger a certain number of stop-loss orders simply because many retail traders push these stop-loss orders. In the same places, real movements and volumes in the

[13:15] market cause not some quick short-term up-and-down movements, but a greater number of traders who trade either on Thomas, a quick sharp upward movement in continuation of the trend, or at the same place, the

[13:30] opposite side joins in and begins to trade a market reversal. 80% of the time, the market is in a sideways movement and only 20% in a trend. You can notice

[13:42] that for almost a year, the market spent the most time in a sideways movement and in a range and only a minimal amount of time in any sharp trend movements,

[13:54] in any sharp trend movements, either downward or upward. During fast impulse movements, most retail traders tend to feel Thomas and try to catch up with the market in the hope of capturing an even greater price movement and

[14:09] Thus, they enter positions in the most unfavorable places for this, which gives large traders an excellent opportunity to fill their positions opportunity to fill their positions due to the increased volume of traders and

[14:22] trade the market in the opposite direction. If the markets and large capital, their only task was to hunt for stop-losses, the market itself would be simply chaos. That is, all movements would be sharp, fast, short- lived,

[14:36] with high slippage and minimal trading volume because the price would not linger at important levels. Let's now take a detailed look at this trading range where someone might think that there was simply a

[14:50] stop-loss or a liquidity capture. The current highs of this trading range were updated above the red line. We are now on the four-hour chart. If this Bitcoin movement were simply a quick hunt for stops before a

[15:06] simply a quick hunt for stops before a fall, then the market spent more than a day in this area before it began. Although, without a doubt, some stop-losses, and you can see this here, worked at the maximum of this movement. Then a

[15:20] full-fledged two-way auction followed between buyers and sellers, sellers due to the fact that a huge number of retail traders, driven by a sense of Thomas They bought the very maximum, flying in at the highs

[15:37] and immediately fell into a trap, and now you can clearly see how, with very large volumes of 142,000 bitcoins, the trading volume for 4 hours was 8683. How many thousands of bitcoins

[15:52] fell into the trap and how many buyers who flew in at the very highs found themselves in a very disadvantageous position. More competent traders who opened short positions that actually activated the

[16:06] downward movement here receive a very big advantage because late longs that opened at the very highs of this movement will be forced to sell their positions at a loss, thereby pushing the price

[16:20] pushing the price down. This is how the market actually works using the mistakes of most traders. This is some kind of short-term manipulation - This is true pricing between buyers and sellers that

[16:35] resolve in one of the directions. This is absolutely necessary information in order to make informed trading decisions and not just assume that some kind of manipulation is happening, stopping out or capturing some kind of liquidity,

[16:50] which in reality has nothing to do with the real picture that is happening in the market, as I showed you. The true volume that is of interest to a large player is obtained. In the results of two-way trading between buyers

[17:06] and sellers, this minimum number of stops at the very top will not fill the volume of interest to him, only creating and staying for a long time above a certain price range, the very trading volume

[17:22] that is of interest to large capital is obtained. And this is not some kind of short-term manipulation. Does this mean that there is no manipulation at all in the financial markets? Of course not. Every market, be it cryptocurrency stocks or Rex, has its

[17:37] share of manipulation and this is always done by different participants. The cryptocurrency sphere is most easily manipulated because many coins have very low liquidity. As you remember, liquidity is the number of pending

[17:52] limit orders in the order book and the lower the liquidity, the higher the volatility and the easier it is to manipulate such a market. Very often, investment funds or various firms that own a large issue of coins

[18:06] that control, for example, 20, 30, 40, 50% of coins create false demand for an asset. This is done through a positive news background or they buy

[18:19] bloggers who post information that The coin will be there now, good news will come out, the coin will start to grow and when a real retail investor comes to the market and creates real volume, then they are used simply as

[18:35] exit liquidity, that is, simply as buyers at some high level, simply selling off their positions. Taking into account the above, thinking that the purpose of the market is to hunt for your stop-loss orders that you placed

[18:49] below the minimum or above the maximum on a five-minute timeframe is more than five-minute timeframe is more than naive. Real money is made on Thomas on really large trading volumes and large price movements

[19:02] when a large number of participants begin to enter the market. This is exactly what can be seen in a deeper analysis of Order Flow and the market footprint, where you can see the true trading volume and the strength of buyers and sellers at any given moment.

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