Liquidity - Key to ICT Trading

Liquidity - Key to ICT Trading

Hyesung: Mentor Huddleston, I'd like to know more about the ICT trading you mentioned last time. In particular, you said that the concept of "liquidity" is important, so could you explain it more easily?

Huddleston: That's a good question, Comet. Liquidity is one of the core concepts really important in ICT trading. Simply put, it represents how quickly and easily you can strike a deal at the price you want. It's like a thermometer of how much money is flowing into the market?

Hyesung: Oh, so high liquidity means that trading is so active that I can buy and sell it at the price I want, right?

Huddleston: Exactly! And especially in ICT trading, buy-side liquidity and sell-side liquidity are two things to look at.

Hyesung: Buy liquidity and sell liquidity? What else is that?

Huddleston: Well, let me give you an example. Buy liquidity is the price point where there are a lot of stop-loss orders set by short sellers. They lose money when the price goes up, so they put up stop-loss orders to automatically liquidate their positions when they go above a certain price.

Comet: So what happens if the price breaks that price range?

Huddleston: Exactly! When the price rises above that level, the stop-loss orders of those many short sellers automatically turn into buy orders, further encouraging the price increase, like a snowball rolling over and getting bigger.

Hyesung: Wow, that's interesting! So selling liquidity is the opposite, right?

Huddleston: That's right. Selling liquidity is the price point where you have a bunch of stop-loss orders set by people with buy positions. When the price goes below that level, the stop-loss orders from buyers automatically turn into sell orders, further accelerating the price drop.

Comet: So where do these pools usually form?

Huddleston: It usually forms a lot around the previous high or low, or around the important support/resistance line, because a lot of traders set their stop loss based on these price points.

Hyesung: I see! So how do the big "smart money" take advantage of this liquidity?

Huddleston: "Smart money" uses it to pinpoint these areas of liquidity and build their positions. For example, it's targeting these liquidity spots and driving down prices and causing a lot of people to stop loss and buying up what they want at a lower price. They're hunting down other traders' stop orders, absorbing the liquidity that comes from them and moving prices in their favor.

Hyesung: What should I do with individual investors then? Are they bound to be completely beaten?

Huddleston: No, it's not. If you understand this movement of liquidity, you might not be a game of "smart money," for example, instead of setting up a stop loss right below the critical support line, it's kind of like setting it up with a little margin. And it's important to be aware that in a section of liquidity, there can be drastic price fluctuations, and to trade carefully.

Hyesung: Thank you so much, mentor Huddleston! I think I've come to understand liquidity properly. Now I should try to read the movement of "smart money" by looking at the liquidity pool when I look at the charts!

Huddleston: Yes, Hyesung. If you practice consistently, you will have an eye for reading the flow of liquidity. Liquidity is the core of ICT trading, so don't forget it! And feel free to ask any questions you have. Let's grow together!