External Range Liquidity (E.R.L): This refers to liquidity outside of a defined trading range. It can impact liquidity based on order flow. If external range liquidity is present at the previous low and institutional order flow is bearish, price tends to be drawn towards this bearish external range.
Internal Range Liquidity:
This type of liquidity is contained within a defined trading range. It often appears in the form of institutional reference points, such as the Fair Value Gap. When external range liquidity is utilized, the Fair Value Gap within the defined range becomes the next focus for liquidity. Once the Fair Value Gap is filled, old lows or highs (External Range Liquidity) then become the new points of interest for liquidity.
In the diagram provided, we observe the concept of External Range Liquidity, represented by an old low. The sequence of events unfolds as follows:
External Range Liquidity: Initially, we identify External Range Liquidity, which, in this case, is an old low.
Retracement into the Fair Value Gap: The price moves upward and retraces into the Fair Value Gap.
Price Decline and Creation of New External Range Liquidity: Subsequently, the price declines, surpassing the old low. This creates a new, fresh external range liquidity point. This new point of interest for liquidity is a result of the price retracing into the Fair Value Gap.
Price Behavior: It’s important to note that price in the Forex market generally operates in two ways: either it revisits old highs and lows or it seeks to reprice itself to correct imbalances.
Fair Value Gap or Imbalance: Within this trading range, there exists a Fair Value Gap or an imbalance located at a higher level.
In summary, this sequence of events highlights the dynamics of External Range Liquidity and how it evolves as price movements interact with Fair Value Gaps and imbalances within a trading range. Understanding these dynamics is crucial for effective Forex trading.
Internal range liquidity:
Understanding Internal Range Liquidity: This is crucial for pinpointing short-term price extremes within a price movement. This knowledge empowers you to make well-informed decisions regarding trade entry and exit. Here’s how it works:
Candle Opening Prices: Pay close attention to the opening prices of candles within a trading range.
Violations of Opening Prices: Observe how these opening prices are violated during price movement.
State of Delivery Change: When these opening prices are violated, it signifies a change in the state of delivery, often indicating shifts in market sentiment.
Trading Opportunities: These changes in delivery state can present trading opportunities, allowing you to adapt your strategy to the evolving market sentiment.
Here are some ways to find internal liquidity:
Fair Value Gaps: Fair value gaps represent the difference between the fair value of an asset and its current market price. Traders often monitor these gaps to predict where the market is likely to converge or reach in the future.
Order Blocks: Order blocks are specific zones where significant orders have been executed, forming a block of orders. Traders use order blocks as reference points to gauge where the market is likely to gravitate or aim for in their trading strategies.
Volume Imbalance: Volume imbalance refers to a trading scenario where the bodies of two adjacent candlesticks do not overlap, but their wicks intersect. This can indicate a difference between a lower close with a higher opening or vice versa. Traders can exploit volume imbalances multiple times, especially when they have a clear bias and anticipate where the market is likely to gravitate in the future, respecting specific levels like the low, the midpoint of the volume imbalance, and the high.
Gaps in Price: Price gaps represent abrupt jumps in the price of an asset. often occurring due to events such as weekend gaps when the market reopens on Monday or significant news releases. These gaps can provide trading opportunities and are important to watch for in your trading strategy.
In summary, understanding these trading concepts, such as fair value gaps, order blocks, volume imbalances, and external range and internal range liquidity in price. can be instrumental in making informed trading decisions and identifying potential price destinations in the market.
These concepts discussed are part of smart money trading, which we have already discussed previously.