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Stop Drawing Liquidity Lines... Use THIS Instead — Transcript

by Andrea Cimi · 3,364 words · 465 segments · language en · Watch on YouTube

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0:00if you think that this is liquidity like
0:02a dumbass uninformed retail Trader
0:04professionals instead use charts like
0:07these to see where actual liquidity is
0:09resting but it's not that easy see you
0:11have two types of liquidity market
0:13makers and Market takers these areas of
0:16liquidity are market makers instead any
0:18buy stops or sell stop is Market taker
0:21liquidity and don't worry banks are not
0:23hunting for your stupid stop- loss all
0:25right today I will give you an insights
0:27on how actual professionals look at
0:29liquidity and we will start debunking a
0:31little bit some disturbingly common
0:33misconception around the ICT space about
0:36liquidity so ladies buckle up and let's
0:39learn how heat Maps work ha by the way
0:41this is one of a series of videos a full
0:44course I'm making about real overflow
0:46I'll leave you the link to the whole
0:47playlist down below enjoy the video ciao
0:49so as you have seen from the previous
0:51videos of this course if you didn't
0:53watch them and you know zero about order
0:54flow you should watch them before
0:55watching this video These and these are
0:58sell limits in the order book they are
1:00the offer or the ask the lower part we
1:03have the bids which are buy limits this
1:05is the so-called passive liquidity so
1:08limit orders that are waiting to be
1:10filled by aggressive orders by market
1:12orders so all of this is our supply of
1:15orders in the market the demand of
1:17orders in the market are aggressive
1:19buyers and aggressive sellers which you
1:21will see in the heat map as these
1:23bubbles anyway what the heat map does is
1:25as you can see projects the current
1:27hottest areas of liquidity so in this
1:30half of the chart you see the current
1:32order book in a heat map graphical
1:34version but before this line which is
1:36the current price we also have the
1:39history of how this order book changed
1:41through time because as you can see it
1:43does change quite a lot and this is the
1:45first very important thing to remember
1:47most of the orders that you will see
1:49here are not going to stay there forever
1:50because this are intentional orders this
1:53is not real Market pressure this is only
1:55an expression of the intention of buyers
1:58and sellers to eventually Buy or sell at
2:01better prices but as with your normal
2:03trading if you put a buy limit you are
2:04free to take it off the market because
2:06maybe you're not so sure of that buy
2:07anymore same thing can happen in the
2:09order book so the areas of liquidity
2:12that you will see are not necessarily
2:14going to be there forever now as you
2:15probably understood the hottest areas
2:17are the areas where there's more orders
2:19the colder the area the less orders
2:22there are on the book and as you can see
2:24watching the chart back in time there is
2:26this constant black area around the
2:28current price which kind of follows the
2:31price this is what I personally call the
2:33Market maker Cloud I don't know if it
2:34has another name but basically in every
2:36Market there are some major market
2:38makers whose only business is to quote
2:42both the ask and the bid at the same
2:44time and make a gain based on pure bid
2:47ask spread I explained this in the
2:48previous video where we talk about MBO
2:50order flow so especially those blue
2:52areas of orders are likely going to be
2:55cancelled before price actually gets
2:57there so what we can do with most heat
2:59Maps is increase or decrease the
3:01contrast in a way that we can filter out
3:03all that noise and just have on our
3:05chart the most important areas but also
3:08as you can see some of the hottest areas
3:10sometime they disappear sometimes
3:12they're canceled and some instead don't
3:15this area for example is a very hot area
3:17of liquidity there's a lot of sell
3:20limits above here so this is a clear
3:23Supply Zone and most Market participant
3:25in the professional sites are going to
3:26see the liquidity most retails won't
3:29because they're not using order flow but
3:30the professional side will and some of
3:32these orders might actually be placed
3:34there by institution or hedge funds and
3:36one of the first takes you want to have
3:37about these kind of zones is the thicker
3:40these areas of liquidity the lesser the
3:42chance that the price will just go
3:43through them but the higher the chance
3:45that price will reverse around these
3:47points maybe get some strength and then
3:49eventually try and hit them now let's go
3:51and zoom in all of this and if you
3:54really closely take a look at this chart
3:56you will see that there's two lines
3:58constantly moving and these lines
3:59represent the best ask and the best bid
4:02which respectively are the best price at
4:04which there's at least one by limit in
4:07the order book and the best price at
4:08which there's at least one sell limit in
4:10the order book so these are the best
4:12prices where you can be executed so if
4:14you say buy a contract market right now
4:18you will be executed here if you sell
4:20market right now you will be executed
4:22here now let's zoom in a little bit more
4:24and watch actual Market mechanics in
4:26action and as you can see as soon as one
4:28of these bubbles hits the green line
4:31that green line goes up because this is
4:33all aggressive orders hitting the ask
4:37lifting the ask Higher and Higher and
4:39accepting to keep buying at higher and
4:42higher prices exactly like inside of an
4:44auction which is why we have to take a
4:45little moment and talk about auction
4:47Market Theory auction market theory was
4:49born around the 70s and the ' 80s and
4:51it's something that you might have heard
4:52of before auction Market Theory
4:54basically implies that market revolves
4:57around two main phases which is faes of
5:00balance where we have a balanced market
5:03and phases where price goes into
5:05discovery of new prices so in a balanced
5:08Market Market participants are agreeing
5:11that this area is the best price to both
5:13buy and sell which is also known as a
5:16fair price or a fair value the biggest
5:19Market participants as you know are
5:21investment Banks hedge funds is
5:23investment funds Pension funds hft firms
5:26universities endowments or college
5:28endowments like the Yale or the Harvard
5:29hedge funds Sovereign funds then you
5:31have ctas cpos blah blah blah so the
5:35participants in the markets are not just
5:37Banks who hunts for retail Traders stop
5:39losses the real war inside of the market
5:42is between big Market participants and
5:44not all big money because this is what
5:47we Define as big money so does not equal
5:49smart money for example I would consider
5:52big money but not necessarily smart
5:54money operators like Pension funds or
5:57investment funds some investment funds
5:58can only buy as an example so they can
6:01only be the buy side of the market so
6:03these Market participants are not
6:05necessarily going to manipulate
6:07orderflow to try and get the best fill
6:10out of the market as investment Banks
6:12hedge funds and hft firms would maybe do
6:15because most of these are long-term
6:17participants so if they have two three 5
6:1910 billion dollars that they have to
6:21fill in a specific Market they're not
6:23going to necessarily spoof and use
6:25icebergs and manipulate order flow to
6:27get their order filled so the
6:28physiological necessities of big
6:31participants are not the same between
6:33big participants what we call Smart
6:34money instead in the realm of orderflow
6:37is let's say trickier participants but
6:39what all of the big money has in common
6:40is that in order to fill their orders
6:43most likely they have to fragment their
6:45order so the best moment for a big money
6:47participant to enter the market is when
6:49there is a fair value when there is an
6:51agreement between the parties that
6:53buying and selling at that price is okay
6:55these are the most liquid moments of the
6:58market where liquidity is at its highest
7:00because the more liquid is the market
7:02the more counterparty there is to my
7:04trades the more I can trade without
7:06impacting price movements and move the
7:09price a lot with my orders take as an
7:11example this book which has an average
7:13of 50 contracts per level if I have
7:152,000 contracts to fill today because
7:18I'm a Trader in the prop desk of a bank
7:20if I directly buy Market at the best
7:23price 2,000 orders I would move the
7:26price let's calculate it 2,000 orders
7:28divid by 50 it's 40 ticks which divided
7:30by four because it's four point four
7:32ticks per point it's 10 points so with
7:34one order I would move the price from
7:36here right over here with just with one
7:392,000 contract order and trust me for
7:41the average S&P 500 order book that's
7:43not a lot of contracts so instead of
7:45filling a 2,000 contracts order here I'm
7:48going to have to accept worse and worse
7:50prices and my average fi will be
7:51somewhere around here when it could have
7:53been around here so to optimize The
7:56Filling of the orders some smart money
7:58participants are going to fragment their
8:00order into smaller and smaller orders or
8:02anyway will prefer to trade when there
8:05is liquidity when there is agreement on
8:07the market if I have to buy 2,000
8:10contracts I want someone to sell me
8:12those 2,000 contracts at that price I
8:14would not like to get it filled this way
8:16so the intrinsic nature of the market is
8:18areas of liquidity of agreement of fair
8:21value and areas where someone is ready
8:24to accept worse and worse prices to get
8:27their fill pushing the auction of orders
8:29higher and higher until a new area is
8:32found where there is liquidity where
8:34there is a counterparty where there is
8:35New Balance in the market and if I keep
8:37drawing price action you would probably
8:39start noticing that these looks a lot
8:42like wof Cycles the only difference is
8:45that what Wu coded more than 100 years
8:48ago is this face and this face and this
8:50face and this face which are also known
8:53as accumulation spring markup
8:55reaccumulation spring markup
8:57distribution up thrust mark down
8:59redistribution up thrust markdown and so
9:02on and so forth so what wov understood
9:06100 years ago without having any
9:08electronic devices whatsoever but purely
9:10drawing daily candle on pieces of paper
9:13was what today we know as auction Market
9:15Theory now today there is a new wave of
9:16trading which is the whole smart money
9:18concept SL ICT School of trading which
9:22also I've seen today this is known as a
9:24power of three which is a concept by
9:26Larry Williams where he also coded this
9:28consolidation manipulation and expansion
9:30or distribution they call this part
9:32distribution or the whole new wave of
9:34ICT Concepts ICT SL smart money Concepts
9:38which is basically consolidation
9:40manipulation expansion then contraction
9:43and so on and so forth so now they just
9:44have basically a fancier name but in the
9:46professional side of the market in
9:47orderflow in auction Market Theory these
9:49things have been known for a while since
9:51around the 70s when Dalton and St Meer
9:53coded invented the market profile the
9:55volume profile and auction Market Theory
9:57as a whole so back to our heat map based
9:59on the auction Market Theory concept
10:02that market are looking for liquidity
10:04and for areas in which is easier to
10:07exchange contracts we can start
10:10understanding that market is attracted
10:12to liquidity and when I'm talking about
10:14liquidity I'm not talking about stop
10:16losses or stop orders because they're
10:18only one side of liquidity they are
10:21these bubbles these bubble are stop
10:23orders so this is one side of the market
10:24the aggressive side of the market but
10:26I'm also talking about these area of
10:27liquidity so these areas of liquidity
10:30usually work as a magnet for the market
10:32so Market will be attracted to these
10:34areas but also what a magnet does if you
10:36pose the same force is it pushes away so
10:39sometimes big areas like this one will
10:41discourage aggressive buyers to go and
10:44buy into that level and to push the
10:46auction higher because if they see that
10:48there's a huge interest in selling at a
10:50price level they will probably at least
10:52slow down or stop their run higher now
10:55some of these areas of liquidity as as
10:57you can see they don't last long but
10:58when price passes through there you can
11:00see that those bubbles are big which
11:02means that aggressive orders has
11:04actually find liquidity in these areas
11:05so some of these areas work as a magnet
11:08as an attraction some of them work as a
11:11threat for current market Direction now
11:13as we can see while price is
11:16consolidating here more and more
11:17liquidity starts building up up here so
11:20there's a huge intention of Sellers and
11:22also a huge intention of buyers down
11:24here but when price moves down all of a
11:26sudden all of that goes away for now
11:28there is one level which is staying
11:29pretty consistent which is this one
11:31below here as you can see in this part
11:33these order are following price action
11:35this is what we usually know as spoofing
11:38so orders which are just to scare the
11:40market and make it go lower let's see
11:42how this will end up and let's also take
11:44into consideration that below here we
11:46have the daily low so probably below
11:48here we're going to have some stops so
11:50when the price goes below here if there
11:52is a bunch of stop orders there we will
11:54see a bunch of these pink bubbles
11:56suddenly entering the market and
11:57sweeping away all all the liquidity in
11:59the book there you go this is exactly
12:01what happened below the low we went
12:03straight to a vertical downward movement
12:06now if we zoom out a little bit we will
12:08see that there's more levels of
12:10liquidity down here now this level of
12:12liquidity has been taken and as this was
12:14taken more liquidity started forming
12:16around here let's see how that hands up
12:18and as you can see now price start
12:20moving higher now as you can see from
12:21the amount of bubbles in this area there
12:24was a huge fight and this fight didn't
12:25happen between Banks and retails let me
12:27tell you this price is now breaking
12:29above these highs so now the most
12:32probable areas the price will go to is
12:34these level over here also because they
12:36seem pretty consistent through time so
12:38usually when there's a bunch of levels
12:40like these there's a good chance we will
12:42go through them one by one as you can
12:44see Market went through the first level
12:46up to the second level let's see if it
12:47will go also up to that level now as
12:50we're getting closer to the New York
12:51session as you can see the market starts
12:54being really really liquid you can
12:57easily see how the books become in
12:59increasingly increasingly hotter as the
13:01cash session starts kicking in and this
13:03is usually where the real fun begins but
13:05as you can see price went exactly right
13:07through all of those liquidity areas but
13:09now there is a big wall of both buyers
13:11and seller both buyers and sellers so
13:13there's no clear difference in Market
13:14pressure so in the first part of the New
13:16York session what often happened is pure
13:19war war between aggressive buyers
13:21aggressive sellers passive buyers and
13:22passive sellers this is a fair market
13:25this this is still a pretty balanced
13:26Market as you can see both from the book
13:28and from price action as you can see in
13:30the first part of the session we've gone
13:32down here to try and meet this liquidity
13:34over here then more liquidity has formed
13:37out above here and we pushed throughout
13:39every single one of these levels and
13:41every more level of liquidity that has
13:43formed was taken now if we zoom out a
13:45little bit we will see that a bigger
13:47cluster of orders is right above here so
13:50we will see how price will interact with
13:52that and the first reaction as we can
13:54see is that after all of this run in
13:56liquidity for the first time price is
13:59aggressive buyers are start to be less
14:01and less active in these upper parts and
14:03some aggressive sellers starts kicking
14:05in now if this area of liquidity after
14:08it's been taken comes back here as new
14:10sell side so from buy side we start
14:13creating a sell side liquidity this is
14:15what is also known as a flipping which
14:17is technically illegal but sometimes
14:20happen in this case it didn't exactly
14:21happen Okay price starts getting back
14:24revisiting these Highs but new liquidity
14:26kicks in right here if we zoom out
14:28probably we will see that this cluster
14:29of liquidity is starting to get really
14:31really hot the market doesn't keep
14:32trying attacking that area they try once
14:34more but they fail again and we go down
14:36and at this point as you can see there
14:38has been a very vertical phase in the
14:40market this is a stop run and you might
14:42think hey this is a stop run so we must
14:44have taken out some daily high or daily
14:46low but as you can see it's not
14:48necessarily that way the lows of the day
14:50and of the session are right below here
14:51but still we can see a very vertical
14:53move which completely sweeped away or
14:56swept away all the liquidity in the book
14:58this what many call liquidity run may
15:00also be one big order of the one big
15:03Market participant but as in most of
15:05these cases this imbalance created a
15:08very thin order book so the path of
15:11least resistance for the price would be
15:13this one now if we zoom out again a
15:14little bit these three areas of
15:16liquidity might as well been taken and
15:18one by one with a little bit of breath
15:20eventually they get taken now as I said
15:22before what happened here is a flipping
15:25so after this liquidity has been taken
15:27and this liquidity was completely ran
15:29through and price inverted from that
15:31area then we have a new buy side
15:33liquidity which was sell-side liquidity
15:35before this is called a flipping and
15:37it's a very common inversion pattern now
15:39we just tapped into this area and all of
15:40the orders were consumed or taken out of
15:42the market so there's a high chance
15:43we're going to break and move to the
15:44next liquidity Zone there you go this
15:46type of analysis or trading is also
15:48called liquidity to liquidity so as you
15:50can see this is a bit of a different way
15:52to look at the market but if you're a
15:54short-term Trader this is a much more
15:55complete version of the markets and
15:58trust me when I'm saying we are just
15:59scratching the surface now because with
16:01MBO orderflow the one I explained in the
16:03previous video you can basically put
16:04heat maps on steroids so if you want to
16:06make me a video about that where I show
16:08you the MBO indicators that shows you
16:11Iceberg orders and stop runs with 100%
16:14objectivity let's reach at least 1,000
16:16likes to this video and let me know that
16:17in the comments all right I hope you
16:19understood if you didn't leave a comment
16:20I'll try to answer and if you enjoy this
16:22video and it opened your mind a little
16:24bit on how actual liquidity Works leave
16:26a like subscribe to the channel and
16:28click the Bell if you want to to be
16:29notified when the next episodes of this
16:30series comes out and hopefully I will
16:32see you in the next video ciao

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