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I Decoded The Liquidity & Manipulation Algorithm In Day Trading - YouTube
Channel: The Secret Mindset
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Price tends to move from structure to structure,
squeezing one side of the market participants
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most of the time.
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It rewards one side of the market, while punishing
the opposite side of participants.
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And liquidity clear outs are constant processes
observed on the markets every day.
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Today we’ll talk about liquidity extraction
and you’ll finally understand why the market
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moves against you the moment you enter the
market.
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So, if you could, like, subscribe to the channel,
and stick around for the full video.
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Do you know the depth of the market you are
trading?
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Regardless of how long you’ve been trading,
at some point you should have questioned the
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depth of the market you are trading.
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In other words, its liquidity.
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Make no mistake, trading the EUR/USD for example
offers different conditions than trading an
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instrument like CAD/NZD (Canadian Dollar versus
the New Zeeland Dollar).
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Or Bitcoin versus Shiba Ina Coin.
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Or Tesla versus some random penny stock.
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Liquidity is the #1 element to make a market
functionable and competitive.
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For a market to be rich in liquidity, there
must be an ample participation of both buyers
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and sellers.
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This is why it makes sense for smart money
or market makers to extract the liquidity
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from the market.
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Liquidity hunting is a very common practice.
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It is nothing more than the art of flushing
the losing players out of the market, which
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are known as weak longs or weak shorts.
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Liquidity clear-outs will often form against
the main trend
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The larger the liquidity zone buildup, the
more likely it is for that zone to be targeted
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by the smart money, especially if it is a
counter trend setup.
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Often, liquidity clear-outs will form against
the main trend.
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For example, in an extended bullish trend
structure, in a consolidation, you will often
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see a clear out of highs and a price reversal
downwards.
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This is more common in very liquid markets
such as Forex or stocks that trade on strong
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volume.
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And why is that?
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Because smart money knows how retail traders
think.
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Smart money knows how retail traders use different
indicators, moving averages, candlesticks,
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and chart patterns in their attempt to day
trade or scalp the markets.
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Smart Money can easily trap retail traders
into the market at poor trade locations and
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then move against their positions, stopping
them out.
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They know that retail traders are programmed
with the phrase “trend is your friend”.
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That’s why many clear-outs will be formed
against the overall trend direction or against
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overall retail trader participation.
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Here’s how liquidity is often positioned
around structures in the market.
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Many traders will use these price levels to
place their entries or exits at, but more
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frequently, their exits or stop losses.
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And these are exactly the zones used by smart
money to trigger a liquidity clear out.
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Institutional players cannot trade the same
as the retail trader, because in low liquidity
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price areas, they might push price too much
with large orders.
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So they use high liquidity zones to put their
own large orders in the market without having
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too much impact on the price.
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Clearouts of liquidity are frequent in crypto
and Forex markets because a strong trending
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market attracts many un-experienced traders
who step into margin trading, usually buying
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around the lows and highs.
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Since they are unaware of the trap, it is
relatively easy for the market maker to replay
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the pattern repeatedly, stopping the traders
with liquidity clear-outs.
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Structural symmetry is most important concept
when it comes to liquidity clear out
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One critical concept for a liquidity clear
out is the consistency of structural symmetry.
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Most targeted clear outs will happen around
structures where the price is consistently
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bouncing from a demand/support level or resistance/supply
level for multiple times before it actually
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breaks it.
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So very important, you should only focus on
such structures to identify and trade liquidity
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clear-outs.
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The more bounces in structure, the better.
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The more time it passes, the more the liquidity
will increase
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As time passes and if price cannot break areas
with multiple highs or lows, chances are the
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liquidity around those price levels will increase
with time.
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The more time it passes, the more the liquidity
will increase (if major highs/lows don’t
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break).
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Because of this factor, if you want to trade
a liquidity hunt pattern, you should be aware
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of how time plays a role in consolidating
the orders above/under key liquidity zones.
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Liquidity clear-out and stop loss hunting
Now, a clear out is a liquidation event where
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the stop losses of buyers or sellers are taken
out, and the breakout traders are trapped
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in.
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Liquidity clear-out and stop loss hunting
are similar concepts.
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Stop loss hunting can happen around any price
or no structure at all, while a liquidity
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clear-out will most of the time happen around
dense price structures with multiple bounces.
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So remember: liquidity clear-outs are most
common around symmetrical structures where
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many traders will watch the same price level
or place stop losses around the same price
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level.
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Therefore market makers would want to see
that level broken and enter their positions
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while liquidation is taking place and absorb
opposite orders.
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Look for a rapid reversal of price back into
the structural support or resistance
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For retail traders like you and me, the aim
should be to spot such potential liquidity
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zones and join the game of market maker and
to avoid being a liquidity target.
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A liquidity clear out should always present
itself with a rapid, strong reversal move
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after a critical low/high is taken out—basically
a rapid rotation of price back into the structural
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support or resistance.
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The speed of rotation back will usually depend
on the market or the liquidity of the market.
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In some markets, the reversal back might take
15 or 30 minutes as the smart money needs
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to collect as many orders as possible over
time, while in FX or crypto, the reversal
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will be much quicker on average (between 1-15
min) since those markets are much more liquid.
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Monitor the lowest low or highest high of
a structure
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If the structure is not even on highs or lows
positioning (for example, when highs or lows
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are connected through a trendline instead
of flat line), then the main area to watch
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is the lowest low or highest high of structure,
that is where the majority of condensed stop
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losses will sit and where breakout traders
might initiate other positions.
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This is the difference between a flat vs.
a trend line positioning of lows and the importance
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of deepest low.
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No matter how the structure is positioned,
the low of the structure will be the key level
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that the market maker will want to clear out
and where the majority of stops will likely
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sit.
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There’s a difference between a targeted
and a non-targeted liquidity clearout, meaning
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triggered by the market maker or triggered
by overall market action.
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On the left side we have a targeted attempt
and on the right a non-targeted one.
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The difference between strong quick moves
initiated by the smart money and the move
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triggered by overall market action is usually
spotted depending on where price starts the
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actual move and if that move is consistent.
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In the case of a targeted attempt, most of
these moves will be initiated in the middle
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of the structure where not much liquidity
sits.
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Meanwhile, strong moves triggered by overall
market action are usually going to be on very
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symmetrical and obvious price extremes.
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The 10 candles rule
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After the liquidity clear out under the lows
or above highs, the price should start reversing
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back inside the structure relatively quickly.
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Timing is the key.
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Let’s say you’re a scalper and you’re
using 1 minute chart.
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My own rule is that it should not take more
than 10 1-minute candles for the price to
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rotate back above support.
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This depends a lot on how big the structure
is, how many candles are in each leg of the
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structure.
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The more candles per leg, the longer it might
take for the liquidity clear out move to happen,
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but it should not be more than 10 candles.
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In the best scenario, it happens within the
first 3 to 5 candles.
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Again it’s a relative concept as it scales
with the time frame chosen.
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Use price alerts below the structural lows
or above highs
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To trade a liquidity clear-out, you need a
clear plan to find the pattern.
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Using price alerts is a useful way to support
the searching process.
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The plan is quite simple.
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Once the potential symmetrical structure is
spotted (with variables that fit a potential
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liquidity clearout), you place an alert below
the structural lows or above highs, depending
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if it's a bull or bear pattern.
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This is important because once an alert is
placed, you can relax and do other stuff and
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only come back once the alert rings and the
price clears the required liquidity area.
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It’s an important tip that helped me a lot.
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Using price alerts is critical to minimize
the screen time and to be more patient and
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"fresh" as a trader.
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At the liquidity clearout area, there should
be significant volume traded
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The key when trading a liquidity hunt is to
focus on volume.
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At the clearout price area, there should be
significant volume traded.
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Let’s analyze this liquidity clearout pattern.
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We have a clear downtrend, with lower lows
and lower highs in the structure.
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This is our main focus point, the lowest low
in the structure.
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This is where our price alert should be.
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A drop into the lows will usually be initiated
by the market maker with a heavy market order
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that will remove liquidity and swipe price
under lows.
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Look at the volume traded at the liquidity
hunt.
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It increased considerably once the lowest
low in the structure was taken out.
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For an entry, you should wait for the liquidity
clear-out and then for the price to start
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moving back above support for a long entry.
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Your risk should be the lowest low of the
clear-out.
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This is where your stop loss should be.
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Here’s another liquidity hunt.
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-we first observe a heavy selloff ahead of
structure
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-we then find a symmetrical structure with
approximately even lows (ensuring even stop
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loss placement under them)
- high volume on the clearout, with the highest
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volume candle in the whole structure
- volatility on the market is high (meaning
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we have a wide range)
- and we have a sharp and quick reversal after
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clearout and a reclaim of the previous support
So after the liquidity clearout, an important
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sign should be the volume.
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The volume traded was the highest 1-minute
volume candle inside the whole price structure.
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As price quickly reclaimed support and then
pushed higher, this was a good moment to open
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a buy position, with a stop loss below the
most recent low.
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A key component for trading the clearout is
that it has to reclaim the support for a long
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trade (or resistance for short trade).
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If it does not reclaim, there is no trade
in the first place, it’s a breakout.
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Here’s an example with high volume clearout
under lows as the long traders are stopped
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out, but the price did not reclaim the support
level, thus this is not a long trade.
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Remember this important point: the faster
the price reclaims support and pushes above
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after the clearout, the better the trade.
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On the best trades, price should reclaim support
within the first 5 candles after the clearout.
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If the structure is not symmetric (with evenly
positioned lows), it is hard to base the entry,
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that is why I prefer to trade structures that
are clean and symmetric.
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This allows precise entry conditions across
all trades.
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Let’s look at this asymmetric structure
and clearout.
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You can observe that lows are not evenly positioned.
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We even have some higher lows.
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This is the deepest lower low, the main area
that you should wait for.
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We have the liquidity clearout and the quick
reversal after clearout.
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But now the question is, where’s our entry?
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This isn’t so clear like in a symmetrical
structure.
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That’s why I prefer the symmetrical ones.
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If you found value and learned something new,
leave us a like.
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And check out our academy program if you want
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Until next time.
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