We often hear the concept of liquidity. So what is liquidity?
To put it simply, we can understand the liquidity of the crypto market as the sum of all cryptocurrency orders at a specific price. Moreover, there is liquidity at every high and low point, and smart money generally uses this liquidity to fill market gaps.
Based on this, we can further classify liquidity, for example:
1. Buy-side Liquidity (BSL)
Buy-side liquidity refers to the levels at which traders who are selling an asset place their stop-loss orders, and these levels are usually placed slightly above or at the same level as the previous high. This is shown in the chart below.
This liquidity usually occurs at PDH (previous day high), PWH (previous week high), EH (Equal High) or HTF (High Tight Flag, referring to a K-line pattern). Therefore, these highs are also regarded as resistance levels and are subject to greater selling pressure.
2. Sell-side Liquidity (SSL)
Sell-side liquidity refers to the levels where traders who want to buy an asset place their stop-loss orders, and these levels are usually located below major support levels (created when a buy stop is triggered below support). This is shown in the chart below.
This liquidity usually occurs at PWL, PDL, EL or below HTF support. This happens when buyers set a stop loss and expect the price not to retrace to a certain point.
To summarize: Buyer liquidity (BSL) generally appears above the resistance level of technical analysis. When the market breaks through these price positions, it will trigger the corresponding stop-loss buy order to generate liquidity. Seller liquidity (SSL) generally appears below the support level. When these price positions are broken, it will trigger the sell order to generate liquidity. As shown in the figure below.
3. External Liquidity and Internal Liquidity
The market essentially moves between external liquidity and internal liquidity. External liquidity is the highest and lowest points of the entire consolidation range (buyer liquidity is higher than the high point of the range, and seller liquidity is lower than the low point of the range). Internal liquidity (liquidity needs to be within a defined range) is the pressure and support level within the consolidation range. As shown in the figure below.
Through the above classifications, we have basically understood what liquidity is conceptually. So, what is a liquidity pool?
Liquidity Pool is a pool with liquidity. Strictly speaking, it refers to a large number of unfulfilled orders gathered within a certain price range. For example, Maker will provide the necessary liquidity for the pool so that Taker can quickly complete the transaction.
This can be extended to lead to a common Liquidity Raid problem.
Smart money (mainly composed of institutional investors) usually targets the large number of stop-loss points set by retail investors. These stop-loss points are also equivalent to concentration points of liquidity and can be well utilized by smart money.
Assuming that a position is generally considered by retail investors to be a support level, a large number of retail investors will therefore set stop-loss orders at the corresponding position. Then, through the manipulation of smart money (price manipulation, information manipulation, etc.), if the price reaches the stop-loss point and the transaction is triggered, a large amount of liquidity will be created and the price will fluctuate violently in a short period of time. Then, smart money will choose to absorb these sell orders at a lower position. After repeated manipulation, it will push up the price with some favorable factors, thereby making a profit.
It can be said that market transactions are sometimes based on people's psychology. Therefore, before trying to trade, you might as well take a look at whether the corresponding target in the market is mainly making money for the long side or the short side, because smart money usually tends to snipe the side that makes the most money. Of course, this process is not as simple as imagined, because there may be a series of shocks in the middle.
Markets fluctuate based on liquidity, and people's money flows among different groups based on volatility.
We will share the content of this issue here. You can view more articles through the homepage of Huali Huawai. The above content is only a personal point of view and analysis, which is only used for learning records and communication, and does not constitute any investment advice.