Liquidity Pools Overview | Supplementary Material

Alright guys, what's going on? This is Ryan, AKA Kenner and Clark, and in this video we're going to talk about liquidity pools. So you've probably heard this term before, but you might not be familiar with what a liquidity pool is, okay, how it can be purposefully used to our advantage, alright. Where they're located and so forth. So what is a liquidity pool? What are liquidity pools? So liquidity pools are areas that will bring a lot of participants into the mix. Okay. Typically you'll find that this is through passive participation.

These will be areas where there's a high concentration of resting orders, either currently resting, sitting dormant on the books or waiting to be triggered. But again, these are areas where we bring all participants into the mix. So you're going to get traders that are actively executing in these areas as well. Where are these located? Now these are going to be typically visible on the higher time frames, but the concept works on the lower time frames as well. As you can imagine though, on the higher time frames they carry more weight. Higher time frames mean that traders of all sizes can get involved, whereas in the lower time frames you're going to be sort of limited by scale. So what you're typically going to see is that these liquidity pools are taken advantage of by larger traders. So therefore these locations that are based on higher time frame locations, let's say in market structure are going to be more useful to them because what they're going to be doing is taking advantage of an area that is going to bring almost all time frames into the mix. So I talked about this in a post not too long ago with Bitcoin swing low as being area that will bring all time frame participants into the mix. Suddenly everyone will be active from your higher time frame position and swing traders to your lower time frame traders as well. So these are going to be majorly important areas on the chart. So areas of market structure, swing highs, swing lows. Okay, equal highs for talking about a range, for example. So let's say we have two equal highs or two equal lows, three equal highs, three equal lows, daily and weekly levels. Okay? So again, higher time frame levels, higher time frame swing points, and then just any major point that stands out in market structure where we can expect some type of trend based stop to be found, for example. So if we just consider what the concept of an uptrend is, series of higher highs and higher lows, and how participants who are trend following are going to be placing their stops, well, they're probably going to be Placing them around the higher lows. So somewhere within proximity to those higher lows. Now why are these useful? These are major decision points, again, where a large amount of participants are going to either enter or exit the market. So because of this, they provide a ton of liquidity to anyone on the other side. All right? Now if you're a large institution or you're a large trader and you're trying to put on a big position, you can't just put it on the same way that a small trader can, okay? Or a small investor can. All right? You need to engineer liquidity. So again, what we talked about, all right, with passive order flow and active order flow, the ones who are getting in that are smaller are typically getting in at market. The ones that are larger, the heavier hand, are going to be getting in through passive means. So what they will need to do is engineer or take advantage of these liquidity pools. So basically, if we think of something like a swing low, there will be a ton of stops below that swing low. There'll be breakout traders that are looking to take advantage of the break of that swing low. So long stops, okay? Short breakout traders. So what this creates is a ton of liquidity. So we have all these resting orders. Maybe a market order to sell in the case of a long, or maybe a market order to sell in the case of a short entry. And this provides liquidity to anyone who is looking to buy down there. So some of the more useful trading setups, such as the failure swing or swing failure pattern, take advantage of this concept. And this is the reason why when you place your stop, you need to be mindful, alright, that you don't just place it one tick below the most recent low or the low in general, okay? And again, while you're also advised to place your entries where others consider placing their stops, okay? Because what you'll see is that these areas where a ton of participants are brought into the mix, these are typically going to be areas where we find good reversals, alright? So where we could take advantage of it, rather not just find, but take advantage of good, good reversal plays. So let's look at an example and show you the what, the where and the why of liquidity pools on something like a Forex chart. Alright guys, so this is a chart of USD jpy. So this is not a cryptocurrency. This is US dollar, Japanese yen. But the range that we're looking at serves as a perfect example to identify liquidity pools. We have major swing highs, swing lows, okay? Equal highs, equal lows, a very defined range. Okay, so I'm going to show you where the liquidity pools on this chart would be. So we have up at the highs over here, down at the lows over here. And now let's get into why these are where they are and how these come to exist, why they are here. And again, this is an area that larger traders and larger, maybe institutional players are going to be taking advantage of. Okay, so if we are currently, let's say that we're currently long on a retest of this area over here. So important flip over here, I come back down to test this zone. We're currently long. So if we're currently long, we're going to be likely placing stops around a portion of market structure. So in this case, this low would serve as a good area if we're currently long to place a stop, either to place it on the books as a stock market order or if we came back down to this area to manually exit the trade. Because if we're currently long, we don't want to be back down here. So longs have engineered sell side liquidity into their position. So sell side liquidity from any longs from here. Now that being said, if this area is approached again, not only would we have longs, they would be looking to puke their positions either manually or through placing of a stop. Previously we'll likely have in this case, anyone who's currently on the sidelines looking to sell a break of this. So anyone who's looking to short might be looking to short a break of this low on the assumption that if this low was to remain important for an uptrend, that a loss of this low clearly meant that the market was not traveling back up and that there was a downside target in the near future. So there is sell side liquidity because of that down here, major swing point, major area of market structure, swing low. Previously this was confluent with an area that was resistance, came back above, came back down and tested. So we have sell side liquidity from anyone who is currently long, anyone who is thinking about entering in a breakout short. All right. And that engineers a ton of liquidity for anyone who is looking to take advantage of that on the other side. Okay, so now remember, if you're a large institutional player, you can't just get in the market the same way everyone else can. So a ton of sell side liquidity here, which means that if you're looking to buy, this is a place where you might want to consider filling a large order. Same can be said at the top. So equal highs, highs of this range. All right, Consider the dynamics that occur up here, mechanically speaking. So we have a high. So if anyone is short from here, say they're short from here, price comes back up here. If they do not cover their position manually by buying in, they likely have stops placed above here. If we are currently on the sideline looking for a long, you might take a breakout trade of this high. So there's buy side liquidity here. So buy side liquidity. And if anyone is looking to fill a large short position, this would be an area that they might want to consider operating in. So they might want to have a large portion of their orders to buy right in this area to capture any of this buy side liquidity that's engineered by these smaller participants. So equal highs at the top, major areas of market structure that in this case shorts are going to be placing their decisions around their entries, their exits and longs are going to be placing any type of breakout trade around. So again, there's a ton of liquidity that's built up in here from passive orders that are currently on the books in the form of stops, and also from anyone who is looking to take advantage of breakout buys or manual entry buys, in this case, a ton of buy side liquidity at the highs and the lows. So if we're a large participant, we want to get in position, we might want to consider engineering liquidity in a way that, you know, pushing the price down or pushing the price up to influence the market to carry it towards our position. In this case, to fill short or fill long. All right, and this is something to be mindful of because if you are currently along and you know that this type of behavior exists in markets, rather say we're currently short, you don't want to just put your stop right above the last high. So say that we're entering in short, say that we have a short here. For example, let's say that we enter in right here. You don't want to just put your stop right at the high of the structure because you can see that oftentimes the market will come up, take the highs and then reverse. This is why it's important to consider giving your stop room to breathe. So maybe placing above the previous high, maybe in the case of a low, giving it maybe 10, 20 ticks. This is important because a lot of the times the market will come down and test this area, as you can see over here, capture all this liquidity and immediately reverse and travel in the opposite direction. You could find these points all over the place. If I zoom out and go on the weekly, I'm sure we'll find some on the weekly as well. Okay, right over here as well. Okay, so major swing point. If we just look at this over here. Okay, so this right here, initially price came down here, up, testing breakout. Okay, comes back down. Major swing point right here. Market comes down again, reverses up after breaking the low again, price comes down. Okay, major swing point right into market structure. All a lot of participants likely thinking that if we come down to these lows, the market's just going to puke. So what do they do? They sell. They either get out of longs or they're selling and getting into breakout shorts. And they engineer this sell side liquidity which helps fill anyone who is looking to buy a large amount of whatever said asset is. So that's liquidity pools. These are going to be located around key points of market structure. So you can imagine at the highs at the lows, areas where you would imagine that a lot of traders would be placing their stops, sort of make or break points on the market. In market structure where a ton of traders are going to be having to rather will ultimately make decisions that influence them either getting in position or getting out of position. Okay. And the idea is that a lot of them doing this helps any larger institution or larger player fill their bigger orders. Okay. So especially over a period of time, you'll see a monthly open will serve as a good location for this or you know, quarterly open and so forth. Alright guys, so those are liquidity pools. Hopefully now you have a bit more of an understanding of how they exist, where they exist, all right, how to spot them and so forth. And these are going to be an important, these are going to play an important role in one of our trading setups which is going to be known as the failure swing or the swing failure pattern. What you call something doesn't necessarily matter as long as you know how it works. So that's that guys, it's been a pleasure exercise proper risk management and trade effectively.