All language subtitles for 1.0 - Liquidity Basics Theory

Liquidity is one of the arguably most
important concepts when trading, whether

you recognize liquidity or not, it is
ultimately what is moving the markets.

So liquidity from a basic financial
definition refers to the ease

with which an asset or security
can be converted into ready cash

without affecting its market price.

So what that basically means is being
able to convert one currency into another.

without inversely affecting the price.

So when we think about this in the most
simplest terms in trading liquidity

is literally everything orders in
the market are really the source

of the liquidity that we're seeing.

The market is in a constant
battle between supply and demand,

supply and demand is exchanging.

And at the end of the day at any given
price on a price chart, there are orders.

people are looking to buy.

People are looking to sell.

It's no different than if we
look at say a grocery store.

For example, if you're buying something
like strawberries, you might get a bushel

of strawberries for $5, but another vendor
has a bushel of strawberries for $6.

More than likely people are
gonna flock to the $5 price.

But as soon as those $5 sell out, but
there's still people looking to buy

strawberries, they'll go to the $6.

And this is what's happening in the
currency market each and every day.

The only difference is it's not
offered by a small local vendor.

What's happening is there are orders
at various price levels willing

to be facilitated for the purpose
of transactions for the purpose of

liquidity, because when you've hit buy
or sell in the markets, I'm sure your

order was able to go through instantly.

Why?

Because there was liquidity or
orders to actually match your order

for every buy order in the market.

There needs to be a sell order on
the other end and for a sell order,

there needs to be a buy order.

It's the battle of fair
exchange and supply and demand.

And the reason why.

Price is moving up and down in a constant
flow as it's moving from pockets of

liquidity to pockets of liquidity.

And what we need to visualize on a
chart in more of a conventional manner

is the fact that what we're seeing.

is just simply orders on a chart.

We're seeing it depicted graphically
via candles, but at the end of the

day, every single price point that we
see every single PIP is a potential

price that an order is sitting at.

And the reason why price is moving up
or price is moving down is to balance

the amount of orders that are resting
in the markets to find a stance of

liquidity to create that balance because
in, in fair exchange, Price will remain

constant or relatively stable, but as
soon as there is an imbalance between

demand or supply, that is when price
will move rapidly, either up or down

to rebalance price, to get it back to
a state of liquidity where orders can

very simply be converted into cash
without inversely affecting the price.

So with that said the understanding.

So with all of that said, there's a
couple different aspects of liquidity.

It goes much deeper, but these are more
so the basic components of liquidity

that we'll be focusing a lot of our
attention on as we navigate the charts

and as we continue to move forward.

So if we're looking at very basically
swing structure or any sort of market

structure, that's being printed in
the markets, what we see is once.

Market structure has been created,
whether it's a swing low or a swing

high, more than likely there are
going to be orders that rest just

above the high or just below the low.

And those orders exist for a
multitude of different reasons.

In a basic sense.

Anyone who would have sold
at this swing high would have

their stop loss just above.

The swing high.

Anyone who bought at the swing
low would have their stop

loss just below the swing low.

If we're looking at people who trade
breakouts, there would be orders to

execute when price breaks down below.

So there would be orders here.

Same thing.

If people are trading the breakout to the
upside, there'd be orders waiting here for

price to break to the upside and simply
put depending on what the price level is.

There might just be orders
sitting at these areas.

And once price tapped in just above
those pools of liquidity or these

pools of orders that exist, it was
enough to take price away because there

was an imbalance between buying and
selling and price will more than likely

return to these pools of liquidity.

At a later point, once a new imbalance
in the market exists because at the

end of the day, price moves to find
liquidity to rebalance the market.

Or in other words, price moves
to find orders to rebalance.

The market price is moving from one price
to another price for various reasons.

But price moves based on the
imbalance between supply and demand.

All that is happening on this chart
is people are buying and selling.

There are orders that
exist at all price points.

These orders need to
change hands for buyers.

They need sellers,
sellers, they need buyers.

And it's this constant battle
between the two that's causing

price to reprice target.

Different liquidity pools or groupings
of orders at various price levels.

So when we're looking at that swing
structure, when we see swing highs, swing

lows, or any bits of structural points
of market structure, and the fact that

we just finished the market structure
section, this will be fresh in your mind.

Think about all of those swing highs
and swing loads that are created,

there is liquidity that rest above
and below those swing structures.

Again, for a multitude of reasons.

One thing I wanna make
entirely clear as well.

There are many thoughts within
this realm of thinking of liquidity

that the liquidity is created for
the sole reason to be taken or.

Price is manipulated to run stops
on swing structure or what we'll

touch on these, uh, to the right,
is that these patterns so to speak

are created simply to run liquidity.

That's not simply true.

There really isn't a entity that
is out there to steal your lunch

or manipulate you at a price.

It's just simply due to the fact of
supply and demand and the order flow

that's going on behind the scenes.

Again, when we're looking at
a price chart, the candles are

simply depicting buying and.

That's all it is.

They're depicting what's happening
to price at a given price level.

And the interaction between supply
and demand is what's gonna give

us our bullish or bearish price.

The reason price price is going up
or down is really just facilitated

through how that transactional flow
is actually happening on the charts.

So while it may be well and good
to say that a large institution

is looking to liquidate and take
out all the stops before it runs.

That's not really the case.

What it bogs down to in many cases
is that there is a algorithm of some

sorts that is run by central banks.

Things like that.

We live in the information
age where AI and computers

run a lot of the things we do.

Why wouldn't they be in the financial
markets and what their job is, is

to offer buying and selling to the
parties that are looking to buy

and sell at various price levels.

With that understanding once price
sees an imbalance, it's gonna start to.

Where is it gonna move?

It's gonna move to where a
large collection of orders

are that will rebalance price.

So in this case, with this swing
structure, this swing high, once we get

some sort of imbalance down here, The
next logical step, that price is more

than likely gonna go when there's an
imbalance is to where more orders exist.

It'll tap into that.

It'll rebalance price.

And then we might see a move back to the
downside because price has facilitated

that imbalance and we've continued moving.

And it's the same thing with
this swing low here as well.

We get an imbalance price dip
into this liquidity pool or

this large pool of orders.

It rebalances price.

It finds that flow between buying
and selling and then price again,

moves in the opposite direction.

Why is it doing that?

Because we rebalance price on the low end.

Now we need to rebalance
price on the high end.

That is what price is doing.

It is just rebalancing.

It's doing its job, creating a fair
marketplace, given supply and demand.

It's providing liquidity, which is just
the ease to transfer an asset to cash.

And that's what it's doing.

Time and time again, what we're doing
with this understanding of swing

structure, relatively equal structure and
trend structure is just understanding.

Logically these large pockets of orders
are likely to sit so we can have a

better indication and understanding of
where price is likely to go when it's

trending, when it's pulling back and just
understanding the flow of the market.

So now that we talked about the swing
structure, The highs and the lows, we

can look at relatively equal structure
because this is just an add-on to the

swing structure, because now what we
have is a double top and a double bottom.

And if you've traded any sort of previous
strategies, a lot of the basic things

that we learned was buying at double
bottoms and selling at double tops.

And when you did that, where
did your stop losses go?

Well, if you were selling at a
double top, you'd put your stop.

Above the highs.

And if you're buying in the double
bottom, you would put your stop

loss just below the double bottom.

That's basic knowledge.

Everyone knows that those orders exist.

And again, we can look for breakout
traders that have their orders

sitting here, breakout traders
that are having their orders

sitting here at the end of the day.

What does this translate to in the
simplest terms that we possibly can?

There's a big pool of money here.

There's a big pool of money here.

Orders just think of it that way.

There are a lot of orders sitting
here, whether they're stop losses,

whether they're buy stops, whether
they're limit orders, you name it.

They're there because
everybody trades different.

Everyone has a different
reason for buying price.

It might be large funds and institutions.

It might be small retail
traders such as us.

It might be algorithms that are
simply just offering, buying and

selling at different price points.

All we need to understand is when
we see these sorts of structures is

that there's just a large collection
of orders that are resting here.

And that price is more than likely
gonna be gravitated to these areas.

Why?

Because it needs to rebalance price
to provide liquidity to the markets.

Again, what is liquidity?

Liquidity is the ease with which an asset.

Security financial instrument of
any kind can be converted into cash

without affecting its market price.

So what does that mean?

It just means that you can buy and close
your position or sell and close your

position, or just be able to execute
a transaction that there's someone

on the other end of your transaction,
ready and willing to exchange with you.

Because, like I said, I'm gonna
repeat this probably a few more times.

If you're buying someone
needs to be selling.

And if you're selling someone needs
to be buying, there needs to be two

parties involved in every single
trade that you're involved in.

Now, of course, when you start
factoring in lot sizes or units, this

is where the fund begins because I
might be buying one lot of currency.

Someone might be selling a hundred lots.

So I've been able to buy one lot of
currency from this a hundred lot sell.

They still need to fill their 99 lots.

liquidity is what's gonna
allow that to happen.

But if that person can simply
not facilitate their order,

their 99 additional lots,
that's where price is going to.

You bet it going to seek liquidity.

It's going to rebalance price.

It's going to find more orders
to facilitate that transaction.

That is all prices doing.

It's moving from one pocket of
liquidity or one pocket of orders

to another rebalancing price because
people are buying and selling.

Constantly.

People are buying and selling at D.

Sizes.

And for everyone that needs to
buy, there needs to be a sell

for everyone that needs to sell.

There needs to be a buy.

And that constant balance in the
market is what provides the liquidity.

And it's also what causes the market
to continue moving up and down.

So now that we've looked at
that we can look at trends

structure a little bit more.

And what we can see is it's a combination
of swing structure, relatively equal

structure, cuz as we're seeing, we have
this downward sloping trend structure.

And I'm sure when, when we first
started trading, a lot of us ju jumped

into trend lines and pattern trading.

And one of the things that we learned
is when we had two lower highs in

succession, we could draw a trend line
and we'd be looking to trade the third

touch as that would be a validated trend.

If you did that, where would you
be putting your stop loss somewhere

above the previous swing highs?

Same thing.

If it was an UPT trend,
you'd have two higher lows.

And the third one you would be
looking to enter, where would you

be putting your stop loss below
one of the structural higher lows?

So we know just given that
in its basic sense, what is

being built above this orders?

A lot of people are also looking to
trade breakouts, trade breakouts.

So.

all of these.

Go back to the exact same thing.

What is happening?

What is being created?

Big pockets of money,
big pockets of orders.

That's all that's sitting
above these swing highs.

These relatively equal structures,
these trends structures.

Why?

Because price needs liquidity to move.

Liquidity is the ease in which an
asset or security can be converted

into cash for every buyer.

There needs to be a
seller for every seller.

There needs to be a buyer.

And in order for that to
happen, we need orders.

And if there aren't enough
orders to facilitate all of those

orders, price needs to rebalance,
or we need to see a reprice.

And that happens with
price moving up or down.

Again, like I said, I wanted to
repeat myself and I said, I would

repeat myself several times because.

It's this basic concept that makes
liquidity and understanding liquidity

incredibly powerful because when we pair
this with market structure, when we pair

this with supply and demand, we have a
full sense of understanding of what's

happening on the charts, because we
know we are trading supply and demand.

We are looking for the imbalances
between supply and demand.

We also know that we use market
structure as our basis of understanding

trend and where price is likely to go.

We pair that with supply and demand.

We start to understand that when price
is forming a higher, low, for instance,

that we'd be looking to buy at demand
zones to then take out the previous

higher high to form a new, higher high.

We can now take that a step further
because we understand that price is

moving from one price level to another
price level to facilitate transactions,

rebalance price, and offer liquidity.

Liquidity is what's moving the market
because simply what we're doing

is converting an asset to cash.

And the only way to do that is
by moving from order to order

balancing, supply, and demand.

We're looking for inbounds and supply
and demand to trade the supply and

demand zones, but we need to understand
liquidity and the areas of liquidity that.

Being created being run, so to speak.

And again, when I use the term being
run, that really just showcases the

collection of orders being tapped
into before something happens.

And what we might see is that price
would run liquidity and then run

the other way or what we might
see as price creates liquidity.

And then continues on and we can use
liquidity for a basis of building trade

ideas or use liquidity as targets as well.

And we'll dig into those sort of
components in the next section

when we dive into internal
versus external liquidity.

But one of the biggest things
is really just understanding.

From a conceptual standpoint, what
liquidity actually is in the markets,

what it represents and what's
actually happening behind the scenes,

because again, price is only moving
up and down to facilitate orders.

That is all that's happening on a chart.

Every single day, the candles, the
technical analysis, everything that

we do as traders is just our way.

of using tools and understanding
to make sense of what's happening

behind the scenes, because at the
most basic level what's happening on

any financial instrument that we see
through a chart is buying and selling

at various price levels, demand supply.

Having that exchange when price
rapidly moves from one direction or

the other, what that means is there's
an imbalance between supply and.

And price needs to seek liquidity
pools or large collections of

orders to, again, rebalance price.

Why?

Because for every buy order, there
needs to be a sell order on the other

end, for every sell order, there
needs to be a buy order on the other

end and it's that constant battle.

And that constant balance in the
market is what causes price to move.

So when we can understand from
a conceptional standpoint where

these large collection of orders
are likely to be, we can understand

why price is gravitating to.