Master Liquidity in Forex Trading with 3 Step Guide

Do you want to understand the term liquidity in forex trading?

In this article we will teach you the meaning and identification of liquidity in forex market.

After studying this article and practicing in the markets, you will be able to spot resting liquidity in the market like a pro.

Now lets begin with defining the term liquidity in trading.

What is Liquidity in Forex Trading?

The word Liquidity itself means convertible to cash.

Liquidity of an asset is marked high if it can easily be sold and converted to cash.

In forex trading liquidity means availability of willing buyers and sellers at market price.

Because if someone wants to buy an asset there should be a seller of that asset and conversely for a seller there should be a buyer.

Liquidity makes it easy for the market to operate effectively.

Liquidity in forex market is measured by the volume of active or pending orders in the market.

And the market makers mostly try to hunt the liquidity of retail traders.

Types of Liquidity in Trading?

As there are two types of orders in trading that are buy and sell.

So liquidity is also of two types which are explained below.

Buy Side Liquidity according to the inner circle trader (ICT) is the volume of pending buy orders (Buy Stops).

When traders execute a sell order mostly they want to protect it with a buy order in case price moves against them.

So they use buy stop to protect their capital and hedge against loss.

Any one selling at a price level will have a buy stop placed above that price.

So buy stops rest above highs and that is why the old highs like weeks high ,days high or equal highs are termed as buy side liquidity.

And the market makers try to grab these highs to convert the pending orders into market orders and then move the market against them.

In this way they make profit from retail traders and this is termed as Liquidity Hunt.

As in the picture above you can see the equal highs which are termed as buy side liquidity.

Market makers swept the old highs clearing buy side liquidity, moved the market down (against the pending orders) a perfect example of buyside liquidity hunt.

Sell side liquidity as defined by the Inner Circle Trader (ICT), refers to the accumulation of pending sell orders, particularly sell stop orders.

When traders initiate buy orders, they often seek to safeguard their positions by placing corresponding sell orders to mitigate potential losses.

Sell stop orders serve as a protective mechanism, activated if the price declines beyond a certain threshold.

Typically, traders position sell stop orders below significant price levels, such as historical lows, including weekly lows, daily lows, or equivalent benchmarks.

These levels are deemed to contain sell side liquidity due to the concentration of pending sell orders.

Market makers attempt to exploit this liquidity by targeting these established lows to trigger the activation of sell stop orders, effectively converting them into market orders.

Subsequently, they capitalize on this influx of market orders to manipulate the market in the opposite direction, thereby profiting from the actions of retail traders.

In essence, the concept of sell side liquidity underscores the strategic interplay between traders and market makers, with sell stop orders serving as pivotal instruments in this dynamic process.

As in the picture above you can see there were established lows and the sell stops were resting below the lows, price after clearing the lows and sell side liquidity moved into the buy side.

This is a perfect example of sell side liquidity hunt.

Why Understanding the Liquidity is Important?

As by the discussion above you have understood the meaning and types of liquidity in forex trading and you also got to know that market makers look to hunt the liquidity.

So market after hunting liquidity of one side moves to hunt the liquidity of other side as you can see in the picture below.

So liquidity is the primary cause of price movement.

And as a trader if you don’t know about the liquidity in the market you can become the liquidity.

So to be a profitable trader you should know and spot the liquidity in market and try to go with flow of market makers.