In the context of financial markets and trading strategies, ICT (Inner Circle Trader) emphasizes the importance of understanding liquidity as a core element. ICT’s approach to trading often involves analyzing and leveraging liquidity in the Foreign Exchange (FX) market. Let’s break down the concept of liquidity from an ICT perspective.
What is Liquidity?
Liquidity is present on the chart in the form of sell-side or buy-side liquidity.
Sell Stops liquidity
Sell-side liquidity is present where buyers place their stop losses and hope the price will not drop from these certain points.
The chart above shows sell-stop areas where retail traders think that due to buying pressure, the price will not drop below these points, as the past price action tells that. So they buy and place their sell stops below these points. However, the algorithm that delivers the price is so clever and trained to find these spots where sell stops are present and hunt liquidity before the price moves up.
Buy Stops
Buy-stop orders are usually placed just above or at the same levels as previous highs, where sellers have placed their stop-losses. Retail traders often view these old or equal highs as resistance levels, believing that they hold a significant amount of selling pressure. As a result of this selling pressure, they anticipate that the market price will not rise beyond these levels.
In other words, retail traders believe that the market price will not rise above previous highs because sellers will place their stop-losses just above these levels.
What is Stop Hunts
The algorithms governing market prices are well aware of this behavior. They frequently push the price beyond these levels intentionally to trigger the stop-loss orders, generating additional liquidity in the process. This practice is often referred to as a “stop-loss hunt.”
These market-controlling algorithms strategically target both buy and sell-side liquidity. They can effectively create liquidity zones resembling the previously recorded high or low points, manipulating market dynamics to their advantage.
Help in Daily Bias
On the base of the liquidity hunt daily bias is easily developed.
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