Market Liquidity
by
EmperorBTC
@EmperorBTC
t.me/EmperorbtcTA
Table of Contents
1. Introduction ......................................................... 1
2. What is Liquidity? ................................................ 2
3. Why is liquidity important? .................................. 4
4. Signs of liquidity build-up:.................................... 6
4.1 Swing points :.................................................... 6
4.2 Relatively equal points (trends): ....................... 9
5. Conclusion .......................................................... 14
Market Liquidity
1. Introduction
Liquidity is the most misunderstood aspect in trading.
The waiting, and execute method NEEDS you to
understand liquidity on the charts.
In this PDF we will learn about one
of the most misunderstood topics, market
liquidity.
After reading this tutorial, you will be able to:
➢ Understand what liquidity means.
➢ Know why liquidity is so important for
trading.
➢ Learn how to identify liquidity build-up
signs.
This Tutorial will assume that you've read all the
mentorship lessons so far. Please check the
Mentorship Index.
This is my best effort at explaining this to you. Please
take out the time to study this tutorial numerous times.
In case of any doubts, remember to post your questions
in the comments section.
Love,
EmperorBTC
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Market Liquidity
2. What is Liquidity?
Liquidity is simply the ease with which an asset can be bought or sold
without affecting its price. It can also be thought of conversion of an
asset into ready cash without affecting market price in the
conventional sense.
Each of these levels in the image represents a
price in the market, if a market is very liquid
there will be buy offers and sell offers at
every single price level. Sometimes certain
levels would get a larger volume than others.
The figure basically shows you the bids
traders have placed in the order book,
including the prices they desire to sell or buy
BTC at.
In liquid markets, if buyers ever want to buy/sell at a market order,
then it’s very likely that their orders would get filled instantly.
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Market Liquidity
The opposite is true regarding illiquid markets because there may be
no buy/sell offers at certain price levels.
Let’s take an example to understand this better:
Trader A owns 1 BTC that they want to sell, and Trader B wants to
buy 1 BTC.
In a liquid market, let’s say the market price of BTC is $20,001. Trader
B would place a bid to buy BTC at $20,000. Since Trader A wants to
sell his BTC immediately, he would sell at market price but would get
his order filled at 20,000 since that is where B left their order. Thus,
“slippage” or the % difference between A’s expected price and the
price the deal was closed at would be (20001-20000)/20001*100 =
0.005%. This is very low slippage which is expected from liquid
markets.
In the case of an illiquid market, let’s say the market price is $20,200,
and B’s bid is at $20,200. Slippage is 1% which is very high for a
significant asset like BTC. You essentially use 1% of value just for the
ability to buy or sell immediately.
Note:
It's popular to believe in the market that the Market Maker is manipulating or controlling the market.Well
it's true that institutions account for 90% of the volume, but markets are run by demand and supply and not
machines or algorithms.
If you're trading a Liquid market like BTC, it's impossible to continously manipulate it without being
manipulated yourself.
HOW TO BEAT THE MARKET MAKER is a good marketing gimmick to fool new traders to sell them your course.
I reiterate, markets are run by demand and supply and the market tries to maintain a normal distribution of
Volume throughout.
That's the truth and no BS.
3
Market Liquidity
3. Why is liquidity important?
Liquidity will always be a magnet for the price after a
significant imbalance between buy orders and sell
orders happens in the market.
Therefore the price is constantly seeking these liquid
areas to rebalance the price at a fair value.
An imbalance of orders causes the
sudden spike up. It was because of
a lack of sell orders above the level.
Figure 1. Example of liquidity on a 1H BTC chart
In figure 1, we see a resistance zone turning into support; most
traders long on the support zone retest, thinking the price is going
higher, placing their stop loss right below that area.
Price sweeps their stop orders (sell orders), then moves up. On the
other hand, breakout traders short the market thinking that the
support is lost; the market sweeps out their stop orders (Buy orders)
and moves in the opposite direction.
4
Market Liquidity
From this example, we can conclude that stop orders placed by long
and short traders are what traders with large position sizes look for
before entering the market. The reasoning is that if there is
insufficient liquidity in the market, the price would already move in
the intended direction for these traders.
For example,
If the market is illiquid and whale wants to buy 1000 BTC for $20k,
the first few BTC bought would be close to $20k, but due to slippage,
most of his order would be filled at, let’s say, $20.2k. His average
entry, in this case, would be close to $200 higher than his intended
buying price. There would be no such issue in a liquid market or an
area of high liquidity.
So how do these large buyers/sellers know where liquidity lies?
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Market Liquidity
4. Signs of liquidity build-up:
Now that we know that liquidity can be a handy tool to add to our
market analysis, we will focus on two market structures that can
show us where liquidity typically builds up.
4.1 Swing points :
There will be liquidity behind every structural swing point in the
market.
Figure 2. Example of a sweep zone after a swing point on
a 1H BTC chart
In figure 2, the price builds up liquidity around the previous swing
point. Traders who short the market with their stop above the last
swing high will have their stop loss hit before the market goes their
way, and breakout traders who aim to long the market will also have
their stop loss taken out. This setup in figure 2 is what we call a swing
6
Market Liquidity
failure pattern or SFP. The entire concept behind it is based on
liquidity. For more detail on how to trade it, please refer to the SFP
masterclass I released. (link - https://t.me/EmperorbtcTA/493)
The key here is to go on a lower timeframe to confirm the sweep and
then enter the market on a pullback. See figure 3.
Figure 3. 15 min BTC chart (zoomed in version of Figure 2)
Figure 3 is a chart of the same example on a lower timeframe. Price
forms a swing high. We mark this area as a resistance zone and see
how the market will react. It’s better to mention here that
resistance/support zones can turn to sweep zones.
We go to a lower timeframe and watch the market closely. On the 15
mints chart, we notice a candle trying to break above this zone but
ends up closing below it. We then wait for sweep candle
confirmation to enter short.
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Market Liquidity
Figure 4. long setup on the 15 min chart
Figure 4 is a bullish example of applying the same strategy. We wait
for the sweep candle to form and take our long setup.
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Market Liquidity
4.2 Relatively equal points (trends):
There will be liquidity behind every structural equal points/relatively
equal points in the market.
Figure 5. Liquidity forming above relatively equal highs on
a 4H BTC chart.
Figure 5 is an example of a liquidity sweep after the price has formed
relatively equal highs. Relatively equal highs can also be seen as
trends since a trend formation consists of 2 points or more.
Traders would think that this is a trend break and that the price will
continue to the upside, only for their stop loss to be hit later on by
the market.
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Market Liquidity
Figure 6. 1H BTC chart sweep
Figure 6 is the same example on a 1H timeframe. We wait for the
sweep candle to form, and then enter a short.
Figure 7. Bullish example on the 4H BTC chart
Figure 7 shows liquidity pools building up below two relatively equal
lows.
The same logic applies; we go to a lower timeframe, wait for a sweep
candle confirmation and enter longs. See figure8.
10
Market Liquidity
Figure 8. 15 min BTC chart
Figure 9. Equal lows on a 1H chart
Figure 9 is an example of liquidity building up below triple-equal
lows. We go to a lower timeframe chart and wait for a sweep candle
11
Market Liquidity
confirmation. Our entry would be on a pullback to the same level as
the equal lows. See figure10.
Figure 10. Figure 9 on a lower time frame.
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Market Liquidity
I really appreciate and respect your love and support
My team and I believe that information and knowledge should be
free.
We constantly strive to bring the best tested trading methods to you.
Making these takes a lot of time and planning and most importantly,
testing.
We have partnered with Bybit to bring the best trading platform and
backtested trading methods to the community together.
Every month we will do a 10,000 Dollars worth of giveaway.
Just sign up, and the top 10 volume traders will be sent the rewards,
every week.
No strings attached. Just sign up and trade. No other conditions at
all.
Link here
Thank You!
13
Market Liquidity
5. Conclusion
I hope this tutorial has helped you learn what
liquidity is, why it is so important in trading, and
how to spot liquidity build-ups in your chart.
The purpose of this tutorial was for you to have a
fundamental understanding of what happens
every time the price breaks a swing point or a
trend line and then starts to reverse.
Understanding liquidity is the prerequisite for
the advanced tutorials we will cover next.
We have a lot more to learn in this mentorship
series. This is my best effort at teaching you
everything I know.
I encourage you to implement what you’ve
learnt on as many charts as possible.
Thank you for your time. I appreciate the love
and support this community gives me every day.
Love,
EmperorBTC
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Market Liquidity