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ICT Mentorship Core Content - Month 1 - Liquidity Runs
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ICT Mentorship Core Content - Month 1 - Liquidity Runs

What is Liquidity?

Understanding Liquidity

  • Liquidity refers to how quickly an asset can be bought or sold in the market without significantly affecting its price.
  • Price action traders focus on identifying reference points where high probability liquidity exists in the marketplace, relating to buy and sell orders.

Market Dynamics and Positions

  • When the market trades lower, short positions become profitable; however, if prices reverse, these profits may erode into losses.
  • Traders with bearish positions often place stop-loss orders above recent highs, indicating a point of interest for potential market movement.

Identifying Liquidity Areas

Buy and Sell Orders

  • As markets rally from lows, buyers holding profitable positions may face losses when prices retrace back down.
  • The goal is not merely to identify patterns but to locate areas where existing orders are likely concentrated.

Smart Money Perspective

  • From a smart money trader's viewpoint, there will be buy stop liquidity above swing highs and sell liquidity below swing lows.
  • Recognizing these positions helps traders understand potential market movements based on existing order flows.

Fundamental Concepts of Liquidity

Old Highs and Lows

  • A fundamental principle is that liquidity tends to exist above old highs and below old lows; markets often target these levels.
  • This targeting leads to price movements designed to "knock out" resting orders like buy stops above previous highs or sell stops below previous lows.

Price Action Analysis

Removing Retail Bias

  • Analyzing price action through this lens eliminates retail biases associated with indicator-based trading strategies.
  • Traders should rely solely on price movements rather than external indicators for directional bias.

Resistance Levels

  • Markets typically struggle to breach old highs or lows due to resistance created by prior peaks and troughs in price action.

Challenges in Trading Conditions

Resistance Encountered

  • For a current market price to reach an old high, it must navigate significant resistance from both old lows (acting as support) and other previous highs (acting as sell stop liquidity).

Trading Strategy Implications

Understanding Market Dynamics and Liquidity Runs

Market Structure: Highs and Lows

  • The market is characterized by lower lows and lower highs, indicating a bearish trend. Profitable traders may have stop-loss orders above the old high, creating a defensive position against price action.
  • Significant economic events (e.g., non-farm payroll or FOMC announcements) can disrupt resistance levels, allowing for liquidity runs. Without such volatility, old highs tend to be well defended.
  • When the market forms an old low, sell stops are positioned below it. A drop in price would face resistance from higher highs and higher lows established during the upward movement.
  • It becomes increasingly difficult for prices to reach down through previous price actions without encountering resistance from established higher lows and highs.
  • A significant market driver is necessary to breach these levels; otherwise, the likelihood of reaching sell-side liquidity below an old low diminishes.

Trading Strategies: Resistance Liquidity Runs

  • Traders should avoid entering positions during high resistance liquidity runs unless there’s a clear opportunity presented by market conditions.
  • There are times when trading with minimal resistance is possible; this occurs during low resistance liquidity runs where price movements are more favorable for traders.
  • A quick descent from an old high indicates potential for a low resistance run if followed by a break below an old low before hitting short-term highs again.

Identifying Low Resistance Conditions

  • Once the market breaks below an old low, it can climb back up through defined ranges until it encounters new short-term highs that create buy-side liquidity above them.
  • Each new short-term high formed presents opportunities for buy signals with little resistance as they approach previous highs where buy stops exist.

Transitioning Between Resistance Levels

  • As the market approaches previously violated lows, it transitions into high resistance territory which complicates further upward movements due to increased selling pressure.
  • Trading within defined ranges allows easier execution of trades; however, once back into areas of prior consolidation, achieving higher prices becomes significantly harder.

Conclusion on Market Behavior

Understanding Liquidity Runs in Price Action

Characteristics of Low Resistance Liquidity Runs

  • The market shows a one-sided price action favoring buys, with minimal retracements, making it an optimal trading environment. This is characterized by breaking short-term highs, indicating low resistance liquidity.
  • Selling short during retracements is effective as there’s little resistance to lower prices. Sell stop liquidity rests below previous lows, which the market aims to target.
  • The absence of significant resistance allows for easier trading; price can move swiftly through levels without much hindrance when approaching old highs and lows.

Examples of High vs. Low Resistance Liquidity Runs

  • A comparison between high and low resistance liquidity runs illustrates their differences. An old high being violated leads to a low resistance liquidity run where the market easily takes out previous lows.
  • When the market rallies after taking out these lows, it indicates a willingness to push lower again, demonstrating characteristics of institutional order flow shifting back to bearish trends.

Market Behavior During Resistance Levels

  • A rally that struggles to surpass swing highs signifies a high resistance liquidity run. The presence of established longer-term highs creates difficulty for new price movements above these levels.
  • If buying occurs near these highs, there's a strong likelihood that they will not be breached due to existing sell orders defending those levels.

Dynamics of Short-Term Lows and Bearish Bias

  • Each formation of short-term lows presents opportunities for the market to expand downwards as they encounter very little resistance on the way down—akin to "a hot knife through butter."
  • The prevailing bearish bias suggests focusing on taking out short-term or intermediate term lows during rallies since each upward movement faces significant challenges against previous highs.

Identifying Opportunities in Price Action

  • Recognizing whether the market is in a state of high or low resistance liquidity helps traders identify potential areas for expansion or retracement effectively.
  • As markets approach old lows with resting liquidity beneath them, small retracements often precede further downward expansions aimed at clearing stops below those levels.

Market Dynamics and Trading Strategies

Understanding Market Retracements

  • The concept of retracement is crucial as it sets up opportunities for new price legs to move lower, indicating a shift in market dynamics. This suggests that previous lows may be violated.
  • Market makers capitalize on buying low and selling to buyers above current market levels, creating buy stops above short-term highs. This strategy highlights the importance of understanding liquidity runs.
  • Smaller retracements allow for easier movement back to old highs due to low resistance, facilitating clean trades through these levels. The market's ability to run through old highs indicates strong momentum.

Identifying Key Levels

  • Recognizing clean high levels is essential; when the market shows clear patterns at these points, it signals potential buy stops above them. Each retracement can set the stage for further upward movement.
Playlists: 2016 ICT Private Mentorship Core Content Month 01
Video description

2016 Premium ICT Mentorship Core Content Video Lectures Audio and visuals are exactly as they were distributed in September 2016. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN Trading performance displayed herein is hypothetical. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance trading results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. Trade at your own risk. The information provided here is of the nature of a general comment only and neither purports nor intends to be, specific trading advice. It has been prepared without regard to any particular person’s investment objectives, financial situation and particular needs. Information should not be considered as an offer or enticement to buy, sell or trade. You should seek appropriate advice from your broker, or licensed investment advisor, before taking any action. Past performance does not guarantee future results. Simulated performance results contain inherent limitations. Unlike actual performance records the results may under or over compensate for such factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profits or losses to those shown. The risk of loss in trading can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. If you purchase or sell Equities, Futures, Currencies or Options you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you may be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a “limit move.” The placement of contingent orders by you, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.