Liquidity - Basics

————-- 001 - Liquid vs Illiquid

The way EXODUS will be structured is in a very concise manner. We will begin by going through the concepts of liquidity to make sure you understand how price is delivered in the forex market. The most important aspect to begin to understand is when price is considered illiquid.

“When price is illiquid, it is considered less dense” -> less volume needed to move the market…

Example as followed :

I like to refer to liquidity as the measurability of how easy price can be transacted. When the market is illiquid, buying/selling an asset will cause more of a drastic change in the assets price => less Transact-able

When the market is transact-able, the buying/selling of that asset does not influence the price change as much.

————-- 002 - 3 Question Rulebook

it will take some time to get used to the concept, but it’s crucial for your development as a trader. By understanding liquidity you can begin to develop a Narrative for yourself on the charts.

Liquidity in assets refers to the formlessness of price Fluctuations. Price moves like water, from prices ( area’s on your chart ) where it is deemed to be expensive back to where price is considered cheap, IE -> Supply and Demand.

Regardless of what the actual price of your Asset/instrumen is, the only important note is your y-axis => price fluctuations. Even without knowing the price or percentage change, being able to look at the above chart you can see how it flows from areas which are lower in the chart ( cheap ) versus those that are higher on your chart ( expensive )

It’s all about building that understanding of the general narrative. To help do that you ask yourself three very simple questions;

- Where did price come from?

- Where is price right now?

- Where is price most likely going to?

————--

Liquidity will be the thin threaded silver-lining which will hold everything intact as we dive into all the concepts throughout EXODUS. That’s why we begin with it so early on, as your expert intuition will be honed throughout this process.

So let's take it a step back, we ask ourselves those three questions mentioned above. Where did price  come from? This is always based on the previous Swing which creates the range. More on that later.

SO

=> 1 - Where did price come from.  The second question is the easiest to answer, where is price now?

=> 2 - Where price is at currently.  Lastly we ask the final question, where could price go to. It’s not rocket science, obviously it could go up or down. But we try to find points where price is MOST likely to go to before a reaction.

=> 3 - Where could price go to? Either the liquidity above or below.

Those two points are simply draws of liquidity. We don't anticipate to take direct entries on these points, but we simply use them to build the narrative. The first piece of the puzzle for us to help create a clear story of probabilities.

This implies and concludes that liquidity will be above old highs and lows, as those are in external area’s of the current price range. Which will most likely give a reaction, and fuel the move anticipated on higher timeframes

————--

Lets take a quick look at an example on GBPUSD, here we see how both liquidity on the upside and on the downside was drawn into.

See how previous lows and highs act as areas of interest when anticipating a draw on liquidity towards them? You must understand that there is no way of predicting which will come first. Only an interest in increasing probabilities when looking at Higher time-frame structure . Does it dictate bullish or bearish trends. Lets run it back on more time.

————--

Based off of that previous example, our favorable side goes to the buyside, the liquidity near previous highs. Why? Because our structure was bullish, look back at the 1 => where we came from. Now try to picture the concept again of water flowing, we are simply picking up liquidity to fuel the move back up.

In the case of the GBPUSD we knocked out liquidity below, to then seek liquidity above.

But this can also happen in the other direction. Where price will run liquidity above the highs before heading lower. Lets take a look at that.

Remember, above the recent highs price will be deemed to be expensive. It’s a more premium price to sell at. Understand how the “institutions” with market making capabilities will want to take the liquidity above, to cover their long positions they opened in order to run the price higher

Part of the regime in this case was to aim for the liquidity pool, the local highs, by pushing price higher into the liquidity pool, use that liquidity to cover the long positions and to then short the market at higher prices.

It’s all part of the quantitative approach  that hedge funds and other market making capable firms have.

————--