Understanding liquidity in simple terms

2023년 11월 3일

Once you understand liquidity, you understand how the market moves and where it might go next.

Let me break it down simply (for beginners):

Your objective, as a retail trader, is to know where the market is going to go.
Once you know where it’s going, you can make money by taking a buy or a sell.

So, how do you know where it’s going to go?
One fundamental way to know this is by understanding liquidity.

So, what is liquidity?
Liquidity means an area where trader’s money is.

What does that mean?
When retail traders place trades, they set their stoplosses as well. When their stoplosses get hit, that means they lose money from their account.
That money then goes to other traders who took opposite trades. So, wherever stoplosses are, traders’ money is there as well.

One more thing you need to understand is how the big players of the market make their money.

The big players are hedge funds, investors, Institutional traders etc.

They make their money by moving price into areas of liquidity.

What does that mean?
It means that they purchase price in huge volumes to move the price in any direction they want.

So, if they buy in huge volumes, price will go up. If they sell in huge volumes, price will go down.

That’s why they’re called market movers. They literally move the market.

So, they buy or sell to move price into areas where traders’ stoplosses are to make money. Because those are areas of liquidity.

How exactly do they make money?
Once they move price into areas of liquidity (areas where traders' stoplosses are), traders' stoplosses get hit and they lose money.
That money then goes into the accounts of the big players.

So, basically, people make money by making other people lose money. 😅

Now, how can you use this information to trade?
You can use this information to know where the market is going to go and then take a trade.

The big players will overpower the other small traders because of their huge volumes.
Because of that, the market will move in whatever direction they push it in.

You always have to trade in the direction which the big players are pushing the market in.

To know where they are moving the market, first know where traders’ stoplosses are (because that’s where the big players will move market towards).

Trader’s stoplosses rest at near swing highs and lows. That’s where the big players will move the market towards.

If the stoplosses are at a swing high, that means that traders have taken a sell.
What you have to do is place a buy because the big players have also taken buys.

You’re basically trading in the direction that they’re moving the market in.

It’s the same thing for taking a sell. If the stoplosses are at a swing low, that means that traders have taken a buy. You have to take a sell.

Your strategies and indicators should be based off of fundamental concepts like this.

I hope you got value out of this!