Liquidity Pools

Liquidity means market activity. It depends on the activity of traders and the total trading volumes. During trading, traders create liquidity by placing buy orders, sell orders, and limit orders.

With these actions, liquidity is created, forming liquidity zones or liquidity pools.

The greatest accumulation of liquidity is observed around support, resistance, and swing high/low levels on higher timeframes.

Particularly relevant are support levels, resistance levels formed by double or triple tops/bottoms, range boundaries. Because most traders trained to trade from the support and resistance levels, and traders lose their vigilance cause they feel they will never break through a level.

Don't expect perfect double tops/bottoms (as in the example above), similar figures to determine the liquidity zone.

It is enough to highlight the likely zones that are most visible that the traders will be able to use them and place their orders.

Example of liquidity near range boundaries:

In the following example, consider the formation of liquidity in the form of reaccumulation (see Wyckoff theory).

The uptrend was formed and continued until the reaccumulation began (liquidity formation), and after the reaccumulation ended, the price continued to move upward, gathering all the liquidity.

From the information above, we can conclude that market makers use sideways movements intentionally to form visible levels for traders around the world.

You should already know that lateral movement is used to accumulate or re-accumulate a position.

If the price moves quietly where there are seldom noticeable volumes - it will not be possible to accumulate the position unnoticeably. The position so is gained by collecting liquidity in the order accumulation areas.

Also, potential levels that contain liquidity are swing highs/low. Especially significant are the highs and lows of higher timeframes. During such movements, it is often possible to observe the price and volume divergences, and it could be an additional signal that the trend is about to change.

How to use it?

Liquidity is a goal, not a potential level from which to gain a position.

How many times have you put a stop loss behind a level in the hope that price won't come back for your stop (because price "shouldn't" break through the support/resistance level, right)?

How many times have you witnessed price knocking out your stop and reversing?

We see liquidity as a goal.

In the following example, we have a false bullish trend. Most traders, based on the resistance level and the subsequent bullish reaction from it (the price updated the high and made a new low, which is higher than the previous one), opened a long position.

All traders who opened positions created liquidity, after which the price gathered liquidity and continued to fall.

Results:

Liquidity is the goal, not the entry point. Always try to find liquidity on the chart. Price moves from one pool of liquidity to another.

You can determine the liquidity zones: the visible zones on the higher timeframes, consolidation boundaries, daily and weekly openings, the logical zones for a stop loss in conjunction with the TA.