Understanding Liquidity in Price Action Trading

Liquidity is defined as the degree to which a market, asset, or security can be quickly bought or sold without causing significant price changes. The discussion emphasizes that time is irrelevant when analyzing price action, focusing instead on identifying reference points where liquidity is likely to exist.

The speaker explains that liquidity is closely tied to buy and sell orders in the market. When the market experiences a swing lower, it indicates that traders have taken short positions, which can become unprofitable if the market reverses. The concept of stop-loss orders is introduced, highlighting that these orders often rest just above recent highs, creating areas of liquidity that the market tends to revisit.

The focus shifts to price action analysis, where the speaker notes that traders should not seek patterns for their own sake but rather identify where existing orders are located. This involves targeting areas where the market has previously shown a willingness to move higher or lower, particularly around swing highs and lows, which are seen as indicators of buy and sell liquidity.

The speaker emphasizes the foundational understanding of liquidity, stating that there is typically liquidity above old highs and below old lows. This understanding allows traders to anticipate market movements, as the market often seeks to 'run out' these levels to trigger buy stops above highs and sell stops below lows, effectively removing retail-minded perspectives and focusing on price action.

The discussion concludes with the observation that while the market tends to run out old highs and lows, it struggles to do so under certain conditions. The speaker illustrates this with an example of market movements, indicating that the presence of multiple peaks and troughs complicates the ability to reach these liquidity levels, particularly when the market is in a downward trend.

The current market action is facing significant resistance as it attempts to reach old highs. This resistance is formed by old lows acting as standard resistance and old highs serving as buy-stop liquidity. The market must navigate through these levels, which complicates the likelihood of a successful upward movement.

In the context of trading, the speaker emphasizes that the current conditions are the least favorable for long positions due to the multitude of resistance levels. The market has been showing lower lows and lower highs, indicating a defensive stance from those holding positions above the old high. A significant market event, such as a non-farm payroll or FOMC announcement, would be necessary to breach these resistance levels.

The discussion shifts to the dynamics surrounding old lows, where sell stops are positioned below. The speaker notes that as the market makes higher highs and higher lows, it becomes increasingly difficult for the price to drop straight down to trigger these sell stops without first overcoming the resistance posed by previous price action. This mirrors the challenges faced when attempting to run liquidity above old highs.

The speaker highlights that significant market drivers, such as unexpected events or announcements, are typically required to penetrate the established price action and access liquidity below old lows. Without such drivers, the market is unlikely to move down to these levels, reinforcing the idea that traders should be cautious in these high resistance liquidity scenarios.

The concept of low resistance liquidity runs is introduced, where the market moves quickly off an old high with minimal retracement. The speaker illustrates that once the market breaks below an old low, it can continue downward until it encounters a short-term high, suggesting that these conditions present more favorable trading opportunities compared to high resistance scenarios.

The market begins to show a low, trading off and forming a higher low. If the market breaks through this short-term high, it initiates a climb back into the defined range created by the broken low, which is characterized by low resistance. As new short-term highs are formed, buy-stop liquidity accumulates above these highs, indicating that a buy signal after a retracement will face minimal resistance, allowing for a potential upward movement.

As the market approaches the violated low, it encounters high-resistance liquidity runs, significantly decreasing the probability of further upward movement. The transition from low resistance to high resistance occurs as the market re-enters a previously established range, making it increasingly difficult to achieve higher highs. The easiest trading occurs within this range, where buy signals can easily surpass old highs until the market reaches the old low, at which point it enters a high-resistance liquidity run.

The discussion emphasizes the concept of low-resistance liquidity runs, where the market structure is bullish after breaking a short-term high. This bullish phase is followed by a quick run-up, but once the market trades below an old low, it can easily retrace back to the point where the short-term high was broken. The one-sided price action during this phase, characterized by minimal retracements, represents the most favorable trading conditions, primarily focusing on selling short as the market moves lower with little resistance.

The speaker illustrates the differences between high-resistance and low-resistance liquidity runs. An example is provided where the market moves lower, violating old highs and lows, and then rallies back up. The low-resistance liquidity run is characterized by minimal resistance when the market trades lower, effectively taking out liquidity below the lows. Conversely, a high-resistance liquidity run occurs when the market struggles to surpass a swing high due to previously established longer-term highs, indicating a bearish shift in institutional order flow.

The speaker discusses the challenges of overcoming a significant market high, indicating that the current rally is unlikely to sustain itself. They emphasize that the existing high will be defended, and any upward movement will likely be met with resistance, making it difficult for prices to surpass previous highs.

The speaker identifies a bearish bias in the market, suggesting that any rally should be viewed as a high resistance liquidity run. They explain that each rally will struggle to break above previous highs, and instead, the focus should be on taking out short-term and intermediate-term lows, which present opportunities for liquidity.

The discussion highlights the concept of liquidity in the market, where old lows are respected and serve as targets for price action. The speaker notes that as the market retraces, it will likely expand downwards to take out liquidity resting below these old lows, indicating a pattern of price behavior that traders can exploit.

The speaker contrasts the strength of support levels (old lows) with the weakness of resistance levels (short-term highs). They assert that every retracement lower creates new buying opportunities aimed at violating short-term highs, as the market is primarily focused on bullish price action, capitalizing on buy-side liquidity.

The speaker outlines a trading strategy that involves buying low and selling to willing buyers above the current market action. They explain that each downward movement in the market is an opportunity for a low resistance liquidity run, facilitating easier trades as the market moves back up to old highs.

The speaker emphasizes the importance of aligning trades with institutional order flow. They suggest that observing price action around specific levels can indicate whether those levels are being defended, leading to easier trading opportunities with low resistance and minimal drawdown.