Do major traders hunt for your stop losses (SL) ?

The word “liquidity” is used a lot in trading and there is a reason for it, its part and parcel of the trading environment and its real. Therefore it makes sense that you understand this factor and adopt into your chart analysis and into your trading strategy.

So what is Liquidity in general terms and what is it when it comes to actual trades ?


Liquidity in trading, whether in traditional financial markets or the cryptocurrency market, refers to how easily and quickly an asset can be bought or sold without significantly impacting its price. In the context of trading cryptocurrencies, liquidity is a crucial factor that can greatly affect a trader’s experience and the efficiency of the market. Here’s a closer look at liquidity in trading crypto:

1. High Liquidity: When a cryptocurrency is considered highly liquid, it means there are a large number of buyers and sellers actively trading the asset. This typically results in tight bid-ask spreads, meaning the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask) is narrow. High liquidity also means that large orders can be executed without causing significant price fluctuations.

2. Low Liquidity: Conversely, low liquidity implies that there are fewer participants in the market, resulting in wider bid-ask spreads. In a low-liquidity market, it may be challenging to buy or sell large amounts of a cryptocurrency without significantly impacting its price. This can lead to slippage, where the executed price differs from the expected price. 

So when it comes to certain assets, especially crypto currencies, there are tokens where liquidity is low and hence higher risk, if you look to buying and selling in large volume ( market cap is a good indicator) because the price could be deemed high but the buyers are not available for your selling volume. I have experienced this a few times so if I was to trade a low liquidity token, I will trade it in small amounts (volume).

eg. Once someone asked me he was missing some significant money in his wallet. After looking into it, we observed how liquidity impacted his trade and hence portfolio. It turned out that he sold his share at Market value and since the liquidity and volume was low, the price he sold was very low and not the price he expected to sell at.

Liquidity is affected by several factors in the crypto market:

Trading Volume: Higher trading volumes generally indicate greater liquidity. Cryptocurrencies with high trading volumes tend to be more liquid. Bitcoin and Ethereum are arguably high liquidity assets. Eg. Exchanges volumes

Exchange Selection: Different cryptocurrency exchanges have varying levels of liquidity for the same assets. Some exchanges may have higher liquidity for certain cryptocurrencies than others.Number of Participants: The more traders and market makers involved, the more liquid the market becomes. Once can look at exchange trading volumes per day to see what this looks like. Eg.  Binance volumes

Market Order Size: Large market orders can absorb available liquidity and lead to price fluctuations. Traders often use limit orders to mitigate this issue.

It’s important to note that liquidity can vary widely among different cryptocurrencies and exchanges/DEXs. Major cryptocurrencies like Bitcoin and Ethereum typically have high liquidity and with less popular or newer coins, liquidity can be low. Traders should assess liquidity along with other factors when selecting assets for trading and be aware of the potential impact of their orders on the market.


In Actual Trading:

Now that we got that out the way, we now look at using liquidity from a trading perspective.

This next definition of liquidity is based on stop losses or open interest or order books. These are a level or levels where orders are placed based (or likely to be placed) on these 3 reasons. Traders or bots can place such orders which can either be hard set or soft set. The hard set orders are visible to the exchanges and hence certain tools can see these and work out liquidity. The soft set levels or levels of interest are planed orders which are not visible but anticipated. is also levels where its soft set SLs as part of their strategy.
Stop loss orders can be hard set or soft set. Soft means that the level has been identified but the trader will place the stop loss when condition meet their plan to minimise loses. Hard set orders are placed and triggered based on a price. Hence fake outs, target these orders for liquidity to only keep going in the general overall trend direction or range. 

Hard and Soft stop loss definition

Levels of interest

As we stated, the Liquidity pools are our potential targets and hence price action strategies follow suite, that is, trades focused on hunting these liquidity (stops). We already mentioned the stop orders are not technically liquidity, but are treated as liquidity, as these orders are only visible to the exchanges at a certain percentage of the volume traded.

This makes trading look more interesting and magical. With that being said, you have probably seen many times markets trade past certain swing points just to completely reverse.

Levels of interest

The truth behind these moves is not hidden in some secret manipulation, but rather in core essence of the markets and the behavior of traders.

All markets work in two-sided auctions, in other words for every buyer there has to be a seller and vice versa.

Although moves past certain swing points trigger some stop-losses as they tend to accumulate in the same areas, what you will often find is that these moves trigger just a larger amount of participation than usual from both mean-reverting and trend-following traders.

Levels of interest

Now as a trader, besides looking for levels of liquidity, based on a methodology, we also want other chart elements in confluence, to make it a more stronger case for a trade for the liquidity levels. What are these chart elements? You already know about previous levels of support and resistance, we have Fibonacci or Moving Average along with more specific levels like Daily, Weekly, Monthly levels as well as Fair Value Gaps (FVG) and with the help of other tools, we look for Point of Control (POC), naked POCs, VAH and VAL. This next video and few to follow, will demonstrate how we find these levels, and as a reminder, this was covered as part of the Support and Resistance module.

A Practical example

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.

Example 2, bitcoin accumulation

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