In the world of trading and investing, it is often said that the market moves from one liquidity zone to another. This concept underlies many strategies and helps to understand why prices move the way they do. Let’s explore what this means and how it works.
What is liquidity?
In simple terms, liquidity is the availability of money or, more precisely, orders (buy or sell requests) in the market. The market always looks for where it can fulfill a large number of orders because this allows major players, such as banks and institutional investors, to easily enter and exit positions without causing sharp price jumps.
Liquidity accumulates at certain points, which for a trader may simply seem like levels of support or resistance. For example, these may include:
* Levels with large volumes.
* Historical highs and lows.
* Round numbers (e.g., 100, 1000).
* Zones where many stop-losses (orders for automatic closure of losing positions) have been triggered.
How does the market "hunt" for liquidity?
Imagine you are a major player who needs to buy a huge volume of an asset, say, stocks. If you simply place a large order, the price will instantly spike, and you will buy some shares at an unfavorable price. To avoid this, the major player must find a place where there are many sellers.
That is why the market often moves to zones where it is believed that many stop-losses or limit orders have accumulated. When the price reaches such a zone, thousands of orders are triggered, and the major player can calmly accumulate or close their position using this liquidity.
There is a kind of "stop hunt" occurring. The price makes a sharp move, taking out traders whose stop-losses were at that level, and only after that does it reverse in the desired direction.
The cycle "from liquidity to liquidity"
This process repeats over and over. The market moves in a certain direction, reaches the first liquidity zone, utilizes it, and then begins to move toward the next one.
* Accumulation. The price consolidates, accumulating orders and liquidity in a certain zone.
* Manipulation. A major player causes a sharp movement to "capture" liquidity hidden behind visible levels.
* Expansion. After gathering liquidity, the price begins a targeted move toward the next goal — the next liquidity zone.
* Reversal. Upon reaching a new liquidity zone, the cycle repeats.
This cycle — accumulation-manipulation-expansion-reversal — is fundamental to understanding how price moves. The market is never static; it is constantly searching for where the next "batch" of liquidity is located so that large capital can operate effectively.
How to use this in trading?
Understanding that the market moves from liquidity to liquidity helps the trader:
* Avoid "stop hunting": do not place stop-losses just beyond obvious levels of support and resistance.
* Predict price movement: understand where the price is likely to head next to "capture" liquidity.
* Look for entry points: enter a trade after the "stop hunt" has already occurred and the price has confirmed the reversal.
Ultimately, the market is a complex mechanism where major players use liquidity for their purposes, and smaller traders must learn to read these movements and follow them. By understanding this concept, you will be able to see the market not as random movement, but as a purposeful search for liquidity.
