Price action to accumulate external and internal liquidity in the cryptocurrency market is the solution
In the world of trading, especially in the cryptocurrency market, price action is one of the most important tools that traders use to analyze the market and make their decisions. To understand price action in more depth, we must address the concepts of external liquidity and internal liquidity, and how they affect market movement.
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What is external and internal liquidity?
1. External Liquidity:
Refers to pending orders (such as stop loss orders and pending buy or sell orders) that are placed outside the current price range. These liquidity areas represent areas where traders place their orders that are typically targeted when the price is moving strongly.
Examples:
Stop loss orders placed below support levels.
Buy or sell orders pending above resistance areas.
2. Internal Liquidity:
Refers to trades that occur within the current price range or areas between support and resistance. This liquidity results from active traders who enter the market directly without waiting for breakouts.
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How is liquidity collected in the market?
1. Collecting external liquidity:
The market deliberately moves to break through known levels (such as support or resistance) to trigger stop loss orders or pending orders.
the goal:
Allowing large financial institutions or whales to collect large orders at better prices.
Mechanism of action:
The price is strongly pushing into a certain area.
The support or resistance level is temporarily broken (known as a “fakeout”).
The price then returns to the original range.
2. Collecting internal liquidity:
It occurs within narrow price ranges when the price is manipulated between support and resistance levels to collect as many orders as possible.
the goal:
Creating a deceptive trading environment that encourages traders to open new trades within this range.
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How do you read price action to identify liquidity accumulation?
1. Search for areas of high liquidity:
Watch for obvious levels such as previous highs and lows.
Rely on price gaps or areas with high trading volume.
2. Fake hacks:
When the price quickly breaks through an important level and then returns below it, this may be an indication of external liquidity targeting.
3. Cumulative pattern:
Watch for consolidation areas where the price is moving sideways. These often mean that there is a buildup of internal liquidity before a big move.
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Strategies for Dealing with Liquidity Pooling
1. Avoid trading based on the first breakout:
The first breakouts are often just a “trap” for traders to collect liquidity.
2. Using Japanese candlesticks or Heiken Ashi candles:
These types of candles help to determine the strength of the real trend after collecting liquidity.
3. Identify demand and supply areas:
These areas often coincide with liquidity accumulation levels.
4. Monitor trading volumes:
An abnormal increase in trading volume on breakouts may indicate a liquidity target.
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A practical example of liquidity aggregation in cryptocurrencies
Let's say Bitcoin is trading at the $35,000 resistance level.
There is external liquidity above this level due to pending buy orders or stop loss orders.
The price quickly breaks this level (to collect external liquidity), and then returns below it.
If you are a trader, you can take advantage of this movement by entering a sell trade after the price fails to hold above the resistance level.
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Conclusion
Understanding the price action related to liquidity accumulation helps the trader predict upcoming price movements and avoid falling into “market traps”. By analyzing key levels and understanding market dynamics, the trader can make smarter decisions and reduce potential risks.