Understanding Liquidity

Liquidity in Actual Trading

Now that we’ve covered the basics, let’s look at how liquidity is used from a trader’s perspective—particularly in relation to stop losses, open interest, and the order book.

In this context, liquidity refers to key levels where orders are likely to be concentrated. These can be actual (visible) or anticipated (invisible) orders based on trader behaviour, strategy, or automation. These levels act like magnets for price, especially during volatile moves or stop hunts.

We often distinguish between “hard set” and “soft set” orders:

Hard set orders are actual, visible stop loss or limit orders placed in the order book. Exchanges can see them, and some tools—like order flow or heatmaps—can visualise these liquidity pools.

Soft set orders are strategic levels that traders identify but don’t place immediately. Instead, they plan to place or execute the order manually once their conditions are met. These levels aren’t visible to the exchange until executed.

Because stop losses are common around swing highs, lows, or key technical zones, price often moves toward these levels to “grab liquidity.” This is why we see fake outs or quick wicks—price hunts stop losses, triggers them, and then continues in the original trend or range.

Understanding where liquidity sits and whether it’s visible or hidden helps traders anticipate fakeouts, traps, or true breakouts.

Hard and Soft stop loss definition

As mentioned earlier, liquidity pools are often key targets in trading, especially when using price action strategies. These pools typically form around clusters of stop-loss orders, and although stop orders aren’t technically “liquidity” themselves, they are treated as such—because triggering them generates market orders that fuel movement.

It’s important to note that only a portion of these stop orders is visible to traders, depending on the tools and exchange transparency. Most of the time, only the exchange knows the full extent of the order book, making these areas somewhat hidden but still highly probable targets.

This dynamic is what makes trading look so “magical” at times—price will often push just beyond key swing highs or lows, triggering stops, grabbing liquidity, and then sharply reversing. If you’ve seen the market run past a key level only to snap back shortly after, you’ve witnessed a liquidity grab in action.

The truth behind these moves isn’t rooted in secret manipulation—it lies in the core mechanics of the market and trader behaviour.

Markets operate as two-sided auctions: for every buyer, there must be a seller, and vice versa. When price moves beyond key swing points, it often triggers clusters of stop-losses that naturally build up in those areas. But more importantly, these moves ignite increased participation—not just from stop-outs, but from both mean-reversion traders looking to fake the move and trend-followers jumping in on perceived breakouts.

What appears as manipulation is often just liquidity-seeking behaviour, a natural part of how markets function.

As traders, identifying liquidity levels is only part of the process. To build a stronger case for a trade, we also look for confluence with other key chart elements . One of the most fundamental—and powerful—of these elements is Support and Resistance.

How you define Support and Resistance depends on your trading approach. In more advanced methodologies, volume and liquidity play a greater role in shaping these levels. As a result, they become more dynamic, constantly evolving with market conditions rather than remaining fixed.

In this tutorial video, we demonstrate our approach to mapping Support and Resistance—starting with the basics for beginners, while laying the groundwork for more advanced techniques in later modules.

BITCOIN Chart from Sept 2023 where we see lots of ranging price action with liquidity levels being hit before a SFP or Failed Auction pattern gives us the trade entry. Note, how we identify levels and where there is much liquidity to the upside which we can say is tempting for the whales to push price up. We will follow this chart down the track later to see the outcome. 

We also added a liquidity tool on TradingView to help us find levels. 
We will also show further down, another chart which show these levels with a heatmap from Tradinglite web site.

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Elliott Wave Flat Corrections – Why Structure Alone Is Not Enough

I recently came across this analysis online discussing Elliott Wave flat corrections, where price is assumed to be forming a textbook ABC corrective structure. While the pattern itself appears valid at first glance, this example highlights a major weakness of pattern-only Elliott Wave analysis : Without liquidity, range context, and acceptance/rejection dynamics, flat corrections quickly become a guessing game. ( link).

Figure 1 – Why This Is Labelled a Flat Correction

In the first example, price is labelled as an ABC flat correction, with wave B retracing to then make wave C completing near the same level as wave A. Structurally, this fits the Elliott Wave definition of a flat.

However, structure alone does not explain how price actually trades within the range.

What’s missing here is:

● Where liquidity is resting
● Why price fails to reach the channel high
● Where meaningful execution zones actually form

This is where traders relying only on wave counts often miss high-probability opportunities.

Liquidity Explains the Missed Move (refer to Figure 2)

Although price trades within an ascending channel, the upper channel boundary is never properly tapped. This is not random.

Liquidity sits below the channel high, meaning price does not need to push higher to find sufficient opposing orders. As a result:

● The “ideal” Elliott Wave short at channel resistance never triggers
●  Traders waiting for perfect structure confirmation are left sidelined

Instead, the true short entry emerges after the liquidity neckline is broken, not at the channel top.

Once that liquidity level fails, the market provides clear information: buyers are no longer in control of the range.

In this thread will cover the following:

1. Weekend liquidity
2. Key liquidity times
3. Internal liquidity
4. Session liquidity
5. Indicators

(all links provided within this thread)

Weekend Liquidity:

Resting liquidity above or below Saturday & Sunday highs and lows. These can then create great levels of interest (POI), either heading into the next week or CME open/Sunday evening.

Note, I sometimes like to include Friday evening pa within this.

Timing of Pivots: 

12:10-12:30 UTC (weekdays)
10-11:30pm UTC (CME Open Zone)

Both are key times I would look for liquidity to be taken on the charts. If liquidity is taken within those specific times, it will significantly increase the chances that I take the trade.

Internal Resting Liquidity:

My best trades come from internal higher lows or lower highs internal from major pivots. Most people overlook this, giving me an edge in my points of interest (POI’s). Using these levels with mentioned timings above is crucial for me.

Session Liquidity:

The London session affects the NY session. NY session has a 92% chance of breaking either London high or low of the same day, leaving only an 8% chance of it staying internally within the London session.

London session highs/lows remain key points for me to wait for.

Expanding Session Liquidity:

Whether it creates an expanding day setup, where each session (starting from Asia and going forward) creates a new daily high and low leading up to the NY session.

Indicators: Helpful indicators:

– Pivotal Moments: tradingview.com 
– Daily Highs/Lows: tradingview.com 

This thread is Part 2 of my views on liquidity. I still look at resting intra day H/L’s and daily h/l’s Part 1 available here

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Liquidity gaps

A final pivot before a large gap to the next swing level is something I always look for. If that level is lost [swing low example], I would expect a large drop and manage my trade accordingly.

Example ↓ Bonus factor: Topping formation, here we have Head&Shoulders.

Liquidations:

One way I indicate a “finished auction” or clean pivot is through liquidation spikes. These often occur as a new pivot is established.

Identifying unfinished pivots by a lack of liquidations vs. a finished pivot with liquidations is one form of confluence in trading reversals.

Example ↓

Very useful tool for all those who struggle to identify internal liquidity. Marks out internal consecutive pivots clearly, aiding in identifying runs of liquidity.

Indicator: pivotal moments

Example ↓

Liquidity Levels

Source: Luckshury 

This thread will cover the following:

– how I find my favourite liquidity levels;
– indicators I use to aid in finding them;
– session candles;
– daily high/lows;
– pivot rays;
– preferred timeframes;

pivot line indicator a simple indicator I had made to suit my needs in marking out pivot/fractal highs and lows by extending the rays out. 

pivot line indicator (2) the concept – look for a series of either higher lows or lower highs on this indicator which do the following:

– remain untapped;
– are close together;
– have a decent gap after them before the next swing pivot.

preferred time frames –
– 5m (scalpers);
– 15m (most used);
– 1h;
– 4h;
– daily (great M-HTF trades);
– daily highs/lows

Note – this does not show swing highs/lows. It shows each individual day’s daily high & low. I use these in a similar manner to the pivot lines series of consecutive HLs or LHs followed by a gap; the last one of those consecutive h/ls offers a trade opportunity.

Session candles untested highs/lows from session candles are also really good resting liquidity points.there is no ray possible for this currently its the same concept just without visual rays.

TPO poor highs/lows, 2 blocks or more highs/lows on TPO profiles: 

– 50 tick on the inverse (BTC/USD) pair when leaving poor highs/lows behind expect continuation/revisits of those levels