Original subtitles

Hey everybody. Welcome back to the currency pros course. We've

got another installment today and today we're going to be

talking about liquidity. So what is liquidity? Well I have

the Currency Pros Ebook pulled up here because I've already

explained it in detail here. So I'm just going to go over a few

points. And then afterwards we're going to head over to the

charts to go through a real example of how we can use

liquidity in our trading. So liquidity is basically well the

definite the actual definition of liquidity is the

availability liquid assets to a market or company. So in the

Forex market that basically that basically means how much

money is available in the market okay? So one important

thing I said here is that for every buyer there is a seller

and for every winner there is a loser. Okay? Now what does that

mean? It means that anytime you're taking a trade and

you're losing it that's adding liquidity to the market. Okay.

You're basically providing money for the the whoever was

the winning trader on that side of the trade right? So if you

lose a trade it's it's helping somebody else make their money

right? You're adding liquidity to the market. Now in order for

there to be constant transactions and quick buying

and selling there has to be liquidity in the market. So I

mentioned down here that the currency market the Forex

market is the most liquid market in the world because it

is most commonly traded right? Whereas the stock market for

example is less liquid because a great deal of investors are

holding positions for many years decades at a time. Let me

let me dive into that briefly. So I don't know how many of you

are familiar with the stock market. Um it's not something I

trade but it's something I invest in for long term

purposes. Um but when I first got started on my trading

journey I did dive into stock trading a little bit before I

was introduced to the Forex market. And the problem with

trading stocks or at least small cap stocks like very you

know less heard of stocks like penny stocks stuff like that is

there's there's not much liquidity. So if you're trying

to trade let's say you you buy a bunch of shares of a company

and you change your mind or you've made some profit and you

want to sell those shares in the stock market well in any

market there has to be somebody on the other end of that trade

if you're trying to sell your shares there has to be someone

that's willing to buy your shares of course we never meet

these people it doesn't work like that it's not like a one

to one transaction but there has to be enough liquidity in

the market okay so there has to be enough buyers and sellers at

the same time transactions can flow effortlessly between the

two. So often times in the stock market if you're trying

to sell your shares sometimes your your broker or your

trading platform won't actually let you if there's not enough

volume being traded on that company. Okay if not many

people are trading that company you won't actually be able to

sell your shares until more liquidity becomes available. So

with the with the Forex market it's vastly different right?

Because it's the largest market in the world trillions and

trillion of dollars traded everyday. Um it's not exactly

something that investors buy and hold long term. We don't

really see that in the forex market. The forex market is

definitely more tuned towards trading. Okay so it because of

that it's very liquid. We can buy and sell instantaneously.

Literally in a in a in a fraction of a second. Our

orders are are filled and activated. Right? So it's it's

very different and it's good to know the differences between

the two. So If you've traded currencies before, you're most

likely familiar with the terms stop hunts or fakeouts, okay?

This refers to a trader's protective stop loss being hit

causing a realized loss and shortly after the loss is

realized, price moves in the direction of your initial bias.

So, a lot of people call this a stop hunt. Um it's not exactly

what it is. As I explain down here, where is it? So, the

market is based on algorithms, right? That's how the market

moves. There's not a single person sitting in a chair at a

trading desk saying, oh I bet there's lot of stop losses up

here. Let's hunt those stop losses. Let's let's stop all

these people out and then go in the direction. It's not exactly

like that. Um it's algorithm and it's literally programmed

to do these things okay because the majority of traders as I

said here 95% of retail traders are using these methods such as

you know double tops, double bottoms, head and shoulders,

flags, wedges, pennants, etcetera. All those typical

price action patterns that you hear about constantly. Um and

that I used to trade too. If the majority of retail traders

are using those methods then of course institutional money is

going to be caught up with those methods right if there's

exist existing algorithms they're going to be

reprogrammed or fine tuned to accommodate for these. So

whenever there's these typical retail patterns in the market

you'll often see these stop hunts or fakeouts or liquidity

grabs right? Um it's just the algorithms way of purging

liquidity adding liquidity to the market right? Or sorry

purge resting stop losses in the market and adding liquidity

to the market right? It just it helps everything out with the

market. It helps the flow it allows institutional money to

place bigger orders because in order for them to place you

know hundreds of million dollars worth of orders. There

has to be enough liquidity in the market. So there has to

constantly be be be losers and winners right? So it's

literally how the algorithm is programmed. It hunts the it

technically does hunt the stop losses but it's not for the

reason that most people think it is right? Now often times

traders have the correct directional bias right? If they

if they're educated with technical analysis you know

it's not hard to spot a trend. It's not hard to spot whether

we're we should be buying or selling. So often times the

direction is correct yet price will grab liquidity from both

buyers and sellers right before the true directional move takes

place. Now in the next section of this Ebook which I strongly

recommend you guys check out if you haven't already. Um I

actually go over a a chart example as well where both

sellers and buyers were kind of screwed over in this scenario

before price took its actual direction, right? I'm not

going to go over that in detail right now because we're

going to go over an actual live chart example on trading view

but definitely check that out because both buyers and sellers

can be affected before the move actually takes place and that's

why it's really important that when we're approaching a trade,

we say to ourselves, okay, where can liquidity, where is

the majority of liquidity right now. Where would price be drawn

to purge before taking its actual directional bias, right?

So where was I here? Where was I? Yeah so like I said often

times traders have the correct directional bias yet price will

grab liquidity from both buyers and sellers right before the

true directional move takes place. Now trading your eyes to

spot where liquidity may be sitting in the market is

important when adding confluence to your trade.

Similar similarly to what we learned about with market

imbalance. Okay. Now we do not trade these methods similar to

the imbalance right? We do not trade solely off of these

methods. We simply use them as evidence when building a case

around a potential trade setup. Alright. It's simple. So these

this is not the entry criteria. Imbalance and liquidity. That's

not the entry criteria criteria. But there are certain

boxes that should be checked before we enter a trade based

on the refined supply and demand that we've located and

the market structure that's been broken. Uh so just to

clarify our entries are based off market structure and

refined supply and demand levels. Um but checking the

boxes off things like imbalance and liquidity and a few other

things as well. Uh that can really help us to have the best

possible outcomes with our trades resulting in a higher

win rate and overall success okay so now that we've gone

over this I'd like to dive into the chart example I have here

so this is Euro USC on the 15 minute time frame and what we

can see here is that we've got clear bullish momentum to the

upside so we're looking for buys we've broken multiple

structural points whether they're substructure or you

know actual proper structure regardless Um we have bullish

order flow to the upside. We've broken structure multiple times

so we are looking for buys. Now right off the bat we have a

refined demand zone right here. Very clear as day. Broke minor

substructure. But overall it led to this entire move which

broke all of this structure right? So there's a few

different places that somebody might target for a long

position here okay this technically right here is the

extreme this is a demand zone but it's the extreme of this

bullish leg now some people also might be targeting this

little cell candle here because it broke minor structure here

could also target that little candle there that was

technically responsible for this break so there's a few

different places that can be targeted I'm looking more so

towards the extreme and there's a few reasons for that and it

has to relate to liquidity okay so basically although there is

three levels here that can be targeted it's highly likely

that these two levels will be used as inducement okay now

what is the term inducement mean I'm sure you've all heard

it thrown around a bunch of times but what does it actually

mean it's basically a trap okay inducement is basically a trap

so people who aren't very educated about this strategy

about supply and demand trading they can target any one of

these and once the once price starts heading towards them

they'll feel more confident in taking their orders hoping that

it's going to go long from there but inducement is

basically they're being trapped into these moves right they're

being induced into these early buys when the actual move may

occur at the extreme okay so as I said it's a it's a bit of a

trap inducement is a trap so whenever there's multiple

stages of entry points here we can actually look at these

levels as potential liquidity because we know that there's

going to be a lot of buyers around these levels there's

going to be people trying to get in on the move early at

these levels and so it's very possible that if the market

needs to you know gather liquidity gather fuel before

it's true move we can identify that these these possible entry

points will be used as inducement to add liquidity to

the market okay Let's play Price Forward and see exactly

what happens.

Do we get a reaction from there?

Okay so as you can see if you were to were to place an order

here you know let's say even if you targeted the equilibrium

but then made your stop loss cover this low over here this

wick low you would have been tapped into the trade had about

1. 5 R floating, let's say you were targeting something higher

now at first glance this looks like a successful trade right

you'd probably be feeling pretty confident but one thing

to consider as well is that if you go to the higher time frame

these two levels look very insignificant right? We're on

the one hour time frame now. When you when you jump up a

time frame you start to realize where the actual important

value area is which is the extreme down here. The first

zone that was targeted. So these other levels look very

insignificant. So if you're stuck on the low time frames

that can be an issue. And it can trick you into getting into

the wrong trades. Right? But as I said at first glance this

looks quite healthy. Now let's play it forward and see what

happens. Again so healthy but then eventually it gets stopped

out right? So that's a loss right there. So at that point

you're probably a little frustrated. You know maybe you

took a break even. Maybe it wasn't even a loss. Maybe

around here you secured profit and moving it to break even

which is fine if you're an aggressive trader. Um but then

you may be targeting this level. Because you still trust

in your analysis. You still trust that the bias is correct.

Which to be fair it is. Again let's say you target the

equilibrium. Stop loss. Stop loss below all of these wicks.

And again you're targeting somewhere up here. So you get

tapped into the trade. Let's play it forward and see what

happens. Floating in profit. Floating in profit still.

What's going to happen?

Okay so taken out for another loss. So although you were

floating in profit you know both of these levels were used

as liquidity grabs some might say or inducement. Okay so what

that means is you were induced into an early position right?

You're the analysis was correct. This is a bullish leg.

You want to have a continuation trade right? You want to get

into buys here. But these two levels were used as inducement.

You took a loss on each of them which in turn adds liquidity to

the market. And you more confluence that if price

mitigates this zone right here then momentum is really

going to kick in and things are going to really take off okay

so these two levels were used as inducement

Now that those two levels are out of the way, let's set an

order for here. Stop loss covering the wick. Target

somewhere up here. I don't know. That's not the point of

this video. Gonna drag this over.

Let's play price forward.

So at this point here you'd probably be pretty frustrated

right? Because your stop loss on this second trade was just

just hit. And then it takes off into what would have been like

you know four R or something within that trade right? So

that that would be frustrating to see.

Now look at that.

Let's just clean this up a little bit. Let's move it over.

Massive massive momentum kicked into the market and the reason

being price gathered enough fuel to take off in that in

that manner right so we use these first two levels as

inducement adding liquidity to the market from all the traders

that took losses in these levels and then the extreme

right the point of origin for the actual move which you can

see clear on the one hour time frame Right? This extreme

demand level here was actually responsible for this break of

structure.

Okay? This was the point of origin for that break of

structure. These other two levels were very minor and

subjective. Okay? So that was used to add liquidity to the

market. And as I said once liquidity was purged from both

of these levels and added to the market price mitigated

almost perfectly the equilibrium of this refined

demand zone and as soon as it mitigated just just taken the

amount of momentum that kicked into the market compare those

full body candles with all of these very small indecisional

candles that that was previous right as soon as price

mitigated this level we took off with huge momentum huge

momentum so these are where the real trading opportunities are

okay although if you're an aggressive trader you could

technically secure profits around these levels when you're

maybe like 22- 3R into your trade you could secure some

profit and move your stop loss to break even so technically

you could profit from these if you're an aggressive if you

have an aggressive way of managing your trades but it's

just not ideal these are not the ideal positions the the

positions you want to be in as I'm sure you've all experienced

at some point are the ones where as soon as it triggers

your entry it just takes off to the moon right or if you're it

you know melts to the ground. Those are the positions you

want to be in. You don't want to be in these trades

where it's just just messing around forever. That is

extremely frustrating. Um so it's just a good example that

when you are approaching a trade you have to say to

yourself okay where can where is liquidity sitting? Do I

want to be part of the liquidity purge? Or do I

want to get in after the market has gathered all the fuel that

it's that it needs for the actual move? Well The second

option is where you want to be, right? You want to get in on

the higher probability trade. So, as I said, you have to

address where liquidity is sitting in the market. Now,

after going through that example, there's one more form

of liquidity that I'd like to show you because it refers back

to what I what was mentioned in the Ebook where most traders

are trading double tops, double bottoms, head and shoulders,

flags, wedges, etcetera. So, there's a good example right

here okay in this area here so most traders would look at this

as resistance okay prices trading higher trading higher

but then it kind of meets a ceiling here okay we keep

tapping into that level over and over again and so most

traders would look at that as resistance or even a triple

triple top quadruple top whatever at this point here it

would have been a double top so you know that there's within

this entire range here there's people trying to go short okay

with their stop loss is just above. And targeting recent

lows because they're looking at this as a double top or

resistance and they're thinking that the market's going to go

short from here, okay? So, it's a bunch of traders. Let me just

copy this a bunch of times just to show you how how much this

is really happening, right? Like there's traders all over

the world that are being taught these techniques which I used

to trade as well. So, I can't even I can't even condemn them

that much. These are things that I used to do before I

learned more about liquidity and smart money concepts and

refined supply and demand. It was an absolute game changer

for me because I used to be on the wrong side of trades just

like this, okay? So, people are looking at this as resistance,

significant resistance because we've now tapped it like four

times, right? So, you can only imagine how many people are

trying to short the market from here, right?

So whenever I see things like this on my chart I have a

template saved LQ for liquidity and it's just a little dollar

sign okay that indicates to me that there's a lot of money

resting at this level here okay because we know how many people

are trying to go short right an abundance of people are trying

to short the market right now and so that means there's stop

loss orders just above these levels okay so what does price

do Well, it would have been into profit for most of those

short traders for a short period of time and then it

gathers some momentum and sweeps that liquidity, okay?

Right here is the liquidity sweep. So again, let me just

place a short position there just to Help everybody

visualize this. Let's say you have a stop loss just above

those highs. You're targeting the lows for a short point of

time you would have been in profit maybe like two to 3R in

profit and then all of a sudden price reverses stops you out

just to go short from that point on right so this is what

I'm saying it's all about liquidity we the market kind of

screwed over sellers here by sweeping their liquidity and

then all the buyers that were trying to get in early here

their liquidity was added to the market as well right small

profit here when they entered but then stop them out again

small profit stop them out right until we the real area of

interest and took off from there okay so these are very

very important lessons guys because these are the things

you have to consider every single time you're entering a

trade okay so now that this liquidity has been cleared all

the liquidity from these two levels has been cleared that

gives price all the all the fuel it needs to really take

off which we can see happened exactly right here okay these

are the types of moves that we're looking for Now again I

mentioned this in earlier on in the video but one way to avoid

getting in early on these moves and being part of the liquidity

purge is to just move up a time frame okay if you're trading on

the 1 minute time frame just permanently that's a very silly

thing to do you have to be aware of the higher time frame

bias the direction in the market you have to be aware of

the higher time frame points of interest and you know if you

were just on the on one higher time frame the one hour instead

of the 15-minute you would have realized that this was the

actual point of interest and everything above it was just a

very very minor part of the overall bullish break of

structure okay but this was the true point of origin so even if

you just focus on that focus on the extreme focus on the point

of origin of course it's good to be aware of recent price

action in these moves but you have to understand that if

you're going to trade from those those smaller time frame

areas those smaller time frame demand areas there they are

valid right? Like this is demand. There are demand

there's demand right here and demand right here. Those are

still valid levels but you have to be aware that there's extra

risk there. So either develop a plan to aggressively manage

your trades. So moving your stop loss to break even and

taking partials or using less risk overall. So maybe 0. 5% of

your capital instead of the full one one to 2% whatever you

you like to do. So those are few things to consider right?

But overall it's Best to just be aware of this. So every time

you every time you approach a trade just think to yourself

where is liquidity sitting okay? We have possible areas of

inducement but this is the extreme so this is the more

highly probable trade and yeah that's how you have to address

it. Okay so if you guys if you guys ever need a a refresher on

this just come back to this video or check out the e-book.

This is a very in-depth description of what liquidity

is and how we can be aware of it. And we even have a detailed

chart example of what to look out for and how to not be part

of the liquidity purge but to get in after the liquidity has

been purged. One little quote that I've I've heard a bunch of

times that I like to keep fresh in my mind is that our entries

are most people's stop losses, okay? It's a it's a funny

little quote that I've heard and it really stuck with me. My

entry is your stop loss, okay? If you really think about what

that means, after 9five percent of the retail traders are

stopped out in the market, we're aware of them potentially

being stopped out right with our strategy we're aware that

liquidity has to be purged and we assess that before we enter

a trade so as soon as all these people are getting stopped out

we're entering okay now imagine you imagine you bought from

these levels you were trying to go long on this pair from these

levels how angry would you be if you got stopped out two

times in a row just to see price do this shortly after and

let's say after first two losses you were feeling less

confident in the strategy so you maybe stayed out of this

third area okay you didn't want to take three losses in a row

because you were so damaged by the first two emotionally right

and then you watch this huge move happen here you would have

been pissed you would have slammed your laptop shut and

walked away like it I've been there it's a very frustrating

feeling to watch Price take off in the direction that you

predicted it would but it takes off without you that's because

you were part of the liquidity you were part of the purge

rather than getting in afterwards. So again my your

stop loss is my entry. Okay? Remember that. You don't

want to be part of that. You want to be you want to be on

the good side of that right? So don't let this be you. You

want to get in after liquidity has been purged. Okay? So I

hope you guys have enjoyed this video. Let me know if you have

any questions. You can reach out to me anytime. And I'll see

you guys on the next one.