What it means
Large traders need lots of orders to fill size against, so price is often drawn to these pools. In the classic sense, liquidity also means how easily you can trade without moving price.
In practice
Thinking about liquidity means asking where the orders are. Stops gather in predictable places: above recent highs, below recent lows, beyond trendlines and around round numbers. Price tends to travel from one such pool to the next.
Traders use the pools in two ways: as targets for trades already running, and as locations where a reversal may begin once the orders there have been used.
What to watch for
Almost any move can be explained afterwards as reaching for liquidity, which makes the idea easy to misuse. It is useful only when the pool and the plan are named before price gets there.
Related terms
4 terms- Buy-side liquidityBSLBuy orders resting above highs: short sellers' stop-losses and breakout traders' buy stops.
- Sell-side liquiditySSLSell orders resting below lows: long traders' stop-losses and breakdown sell stops.
- Liquidity sweepPrice wicking through an obvious high or low to take the stops, then closing back inside and reversing.
- Order bookThe live list of every waiting buy and sell order, with the size at each price.