Internal and external liquidity

Buy and sell liquidity can be divided into two types - internal liquidity and external liquidity.

By withdrawal of external liquidity we can determine the trend.

If external liquidity is updated from the highs and the lows remain - the trend is upward. If external liquidity is updated from the lows and the highs remain - the trend is downward.

How to define external liquidity?

External liquidity is formed behind the structural elements during a trend movement.

In a trending movement, external liquidity will be updated when new HH / LL structural elements are formed and when confirmed HL / LH elements are broken.

How to define internal liquidity?

Internal liquidity is formed between structural elements during a trend movement (HL and HH in an ascending structure, LH and LL in a descending structure).

In a trending movement, the update of internal liquidity will occur during a complex correction, on the formation of HL and LH.

Liquidity during an uptrend

In an uptrend, after an update of external liquidity to buy, an update of internal liquidity to sell is expected.

The best opportunities to open long positions will appear when testing bullish zones of interest below 0.5 of the trading range (in the Discount zone), in front of which pools of internal liquidity to sell are formed.

Targets for position fixation can be an update of a significant pool of internal liquidity to buy and an update of external liquidity behind the previous HH.

Schematic example of external and internal liquidity withdrawal during an upward structural movement

Red shading - External liquidity

Blue shading - internal liquidity

Smart Capital artificially forms pools of internal liquidity to sell in front of the bullish zone of interest to fill its orders. Internal and external liquidity to buy will be formed by smart capital in order to make a future markup of the asset by activating stop losses.

Example of withdrawal of external and internal liquidity during an upward structural movement

After updating the internal liquidity to sell and testing the zone of interest, the price will tend to update the external liquidity to buy, forming a new higher high (HH).

To more accurately determine the internal liquidity, you can use the lower timeframes.

Liquidity during a downtrend

In a downtrend, after an update of external liquidity to sell, an update of internal liquidity to buy is expected.

Pay attention to bearish zones of interest above 0.5 of the trading range, in front of which pools of internal liquidity to buy are formed. On activation of these stop losses there will be opportunities to open short positions.

Targets for position fixation can be updating of the significant pool of internal liquidity for selling and updating of external liquidity behind the previous LL.

Schematic example of withdrawal of external and internal liquidity during a downward structural movement

Red shading - external liquidity 

Blue shading - internal liquidity 

Internal liquidity for buying will be used by smart capital to fill their orders. External and internal liquidity to sell will be used for future markdowns and position allocation.

Example of external and internal liquidity withdrawal during a downward structural movement

Red shading - external liquidity 

Blue shading - internal liquidity 

After updating the internal liquidity to buy and testing the zone of interest, the price will tend to update the external liquidity to sell, forming a new lower low (LL).

External and internal liquidity should always be considered in conjunction with the context of the higher timeframes - the overall price direction and zones of interest.