In the world of trading, especially from the perspective of the ICT (Inner Circle Trader) theory, the market does not move randomly. On the contrary, it is guided by a sophisticated algorithm designed to deliver prices with a clear objective: to capture liquidity.
What is Liquidity? Liquidity refers to the buy and sell orders that traders place at different price levels. These orders accumulate in specific zones such as lows, highs, supports and resistances, creating what is known as "liquidity pools".
How does the Market Algorithm work? The algorithm that controls price delivery is constantly looking for these liquidity zones. Imagine that the market is a cunning predator, and liquidity is its prey. When prices approach a level where there is a large amount of accumulated orders, the algorithm tends to execute fast and sometimes unpredictable moves to capture that liquidity.
The Role of the Algorithm in Liquidity Collection:
1. Price Manipulation: The algorithm can push the price up or down to trigger stop loss orders, which are sell or buy orders that traders place to limit their losses. By triggering these orders, the market gains the liquidity needed to facilitate large moves.
2. Liquidity Sweeps: Occasionally, you'll see price break through a key level, only to quickly reverse in the opposite direction. This is a classic sign of a liquidity sweep, where the algorithm has captured accumulated orders and then moved in the opposite direction, leaving many traders trapped.
3. Fair Value Gaps (FVG): These are spaces on the chart where the price moves quickly without leaving any traces of significant transactions. The algorithm seeks to return to these areas to “fill” them, capturing any residual liquidity that may be left.
Become an Informed Trader: Understanding how the market algorithm takes liquidity is essential to successful trading. With this knowledge, you can anticipate key market movements and position yourself in strategic places, maximizing your chances of success.
Do you want to learn more about how the market works from an ICT perspective? Join our community and master the art of institutional trading!
