What are liquidity and liquidity pools? What types of liquidity are there?

We often hear the concept of liquidity. So, what is liquidity?

To understand it simply, we can think of liquidity in the crypto market as the total sum of all cryptocurrency orders at a specific price. Moreover, every high and low also has liquidity, and smart money generally utilizes this liquidity to fill market gaps.

Based on this, we can further categorize liquidity, such as:

1. Buy-side Liquidity (BSL)

Buy-side liquidity refers to the level at which traders selling assets place their stop-loss orders, and these levels are usually set slightly above the previous highs or at the same level as the previous highs. As shown in the figure below.

This type of liquidity generally occurs at PDH (Previous Day High), PWH (Previous Week High), EH (Equal High), or HTF (High Tight Flag, which refers to a candlestick pattern). Therefore, these highs are also considered resistance levels, bearing significant selling pressure.

2. Sell-side Liquidity (SSL)

Sell-side liquidity refers to the level at which traders buying assets place their stop-loss orders, and these levels are usually located below major support levels (triggered when buy stop-loss orders are activated below the support). As shown in the figure below.

This type of liquidity generally occurs at PWL, PDL, EL, or below HTF support. For example, it happens when buyers set stop-loss orders and expect the price not to retrace to a specific point.

In summary: Buy-side liquidity (BSL) typically appears above resistance levels in technical analysis, and when the market breaks through these price levels, it triggers corresponding stop-loss buy orders, creating liquidity. Sell-side liquidity (SSL) generally appears below support levels, and when these price levels are breached, it triggers sell orders, creating liquidity. As shown in the figure below.

3. External Liquidity vs. Internal Liquidity

The market essentially moves between external liquidity and internal liquidity. External liquidity refers to the highest and lowest points of the entire consolidation range (buy-side liquidity is above the range high, and sell-side liquidity is below the range low), while internal liquidity (liquidity needs to be defined within a range) refers to the pressure and support levels within the consolidation range. As shown in the figure below.

Through the above classifications, we have a basic conceptual understanding of what liquidity is. So, what is a liquidity pool?

A liquidity pool, in simple terms, is a pool of liquidity, specifically referring to a large number of unfilled orders aggregated within a specific price range. For example, makers (limit orders) provide the necessary liquidity for the pool so that takers (market orders) can execute trades quickly.

This leads us to a common issue known as Liquidity Raid.

Smart money (mainly composed of institutional investors) often targets the large number of stop-loss points set by retail investors, which are essentially concentrated points of liquidity that can be effectively utilized by smart money.

Suppose a position is widely regarded by retail investors as a support level, and many retail investors set stop-loss orders at that position. If smart money manipulates the market (through price manipulation, information manipulation, etc.) and the price reaches the stop-loss point, triggering trades, it will create a large amount of liquidity and cause significant short-term price fluctuations. Then, smart money will choose to absorb these sell orders at a lower position, and after repeated manipulation, combined with some positive news, push the price higher to profit from it.

It can be said that market trading sometimes revolves around people's psychology. Therefore, before attempting to trade, you might want to check whether the corresponding assets in the market are primarily benefiting the bulls or the bears, as smart money usually tends to target the most profitable side. Of course, this process is not as simple as it seems, as it may involve a series of fluctuations.

The market fluctuates based on liquidity, and people's money flows between different groups based on these fluctuations.

That's all for this issue. You can find more articles on the Huahua homepage.