Crypto Academy / Season 3 / Week 6 / Homework Post For Professor @cryptokraze - Trading Liquidity Levels The Right Way

Hello everyone, this is a homework post for Professor @cryptokraze. Let's get started

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What is your understanding of the Liquidity Level. Give Examples (Clear Charts Needed)

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Before we look at understanding what is liquidity level, we should first understand what is liquidity in itself. Liquidity in the markets, can be said to be the ability of an asset to be converted to cash with ease. Let me relate this to cryptocurrency, we can say, that liquidity is the ability to convert a coin to cash or to convert it to another coin with ease.

The most important thing to understand about liquidity is the ease with which this conversion is made. There are markets with low liquidity and markets with high liquidity. When the financial market has a low liquidity, the market is unstable and there aren't many active buyers and sellers.

On the other hand, when the market has a high liquidity, then there are many participants in the market. There are many orders to buy and sell that asset. Trading in a market with high liquidity is very important for a trader, so that you can quickly buy the asset and when it's time to exit the market, you can also easily do that, at any given moment in time; because there are many pending orders. It will be really unfortunate to trade an asset when you find it difficult to convert your asset to cash.

It's also easier to study and follow technical analysis in markets with high liquidity, as the market is more stable and precise. Unlike in a market with low liquidity, in which case large trades can affect the price, and cause volatility in the markets. Thereby, making it difficult for technical analysis to be relied on in low liquidity markets.

In financial markets, there are levels where there is high liquidity, meaning that there are many buyers and sellers who have placed orders at this particular level. And it's easier to convert your asset to cash because of the many pending orders. This level where there's high level of activities as a result of many buy and sell orders is called Liquidity Level.

Liquidity level includes areas where traders place their stop loss in the event that the market does something different from their predictions. This means that there are pending orders at stop loss to cut losses if that happens. Usually when a liquidity level is reached, a change in price movement is expected.

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Explain the reasons why traders got trapped in Fakeouts. Provide at least 2 charts showing clear fakeout.

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First, we should understand what a fakeout is before, we look at reasons why traders get trapped in fakeouts. A fakeout can be said to be a situation in which an investor in the markets, get into a position predicting a particular price movement that doesn't happen. Another term for fakeouts is false breakout.

It's called false breakout or fake out, because the price moves outside of the anticipated prediction or chart pattern only shortly, but then reverses and moves inside the chart pattern again. But by the time it moves right back, it has already taken out the stop loss of retail traders.

The main reason for fakeouts, is the activities of whales or we may also call them big financial institutions, with lots of money to manipulate the market. And move the price of assets in the direction of their choosing. At these high liquidity levels, where assets can be easily converted to cash, institutions aim to make big and quick profits for themselves by pushing the price of the asset above or below the anticipated liquidity level.

They do this with the aim of trapping retail traders, so that there will be enough cash flow at those liquidity levels. The trap comes into play when the retail traders place order to enter position at a particular liquidity level, and they place their stop loss as well, in case things don't go their way. When the price reaches that liquidity level, big financial institutions put in lots of money in the market to break this liquidity level.

As a result, the stop loss of retail traders are taken out. Now, the retail investors see that there's a breakout, not realizing that it's a false breakout or a fakeout; they enter new position in the direction of the market. Only for the big institutions to manipulate the market again and cause a quick reversal. At this point the retail traders have been trapped, some may keep expecting that the price will still continue in the direction, but this never happens, and they're trapped.

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How you can trade the Liquidity Levels the right way? Write the trade criteria for Liquidity Levels Trading (Clear Charts Needed)

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By looking at liquidity levels, we can see that it's either you make profit from it, or you make losses. If you're a retail trader, and don't want to be the one trapped by these big financial institutions, then you have to understand how to trade liquidity the right way. In order to make profits from the market.

When price reaches a liquidity level, there are only two things that can happen - it's either the price breaks the liquidity level and goes on, or it reverses and changes direction. In order to trade liquidity right, there are two strategies that you should understand, and they are -

• Market Structure Break (MSB) - Reversal strategy
• Break Retest Break (BRB) - Continuation strategy

By understanding and applying the criteria for making trades using these two strategies, you can trade liquidity right. Here are the trade criteria -

Trade Criteria For Market Structure Break Strategy

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• The market should be in a downtrend
• The price should have several lower lows, then a higher low
• After confirmation of higher low, the neckline should be marked
• You wait until you see a bullish candle that breaks the neckline and closes above it.
• Just above the Market Structure Break, you should place your buy trade.

Exit Criteria - Risk:Reward 1:1

• The market should be in an uptrend
• The price should make several higher highs, then a lower high
• After confirmation of lower high, then mark the neckline
• You wait until you see a bearish candle that breaks the neckline and closes below it.
• Just below the Market Structure Break, you should place your Sell trade.

Exit Criteria - Risk:Reward 1:1

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Trade Criteria For Break Retest Break Strategy

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• You should mark the level when the market is approaching a resistance level
• The price should break the resistance level, and then make a swing high point
• The price after making the swing high point, should retest the resistance level, and move up again
• It becomes a valid break, when the price breaks the new swing high point
• You should enter your buy trade position, just above the break of the new swing high point.

Exit Criteria - Risk:Reward 1:1

• Mark the level when the market is approaching a support level
• The price should break the support level, and then make a swing low point
• The price after making the swing low point, should retest the support level, then move down again
• It becomes a valid break, when the price breaks the new swing low point
• You should enter your Sell trade position, just below the break of the new swing high point.

Exit Criteria - Risk:Reward 1:1

Draw Liquidity levels trade setups on 4 Crypto Assets (Clear Charts Needed)

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Here are some examples of trade setups for 4 different crypto assets on liquidity levels. I'll be trading the liquidity levels using the two strategies explained above - which are Market Structure Break (MSB) for reversal, and Break Retest Break (BRB) for continuation -

Conclusion

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As an investor in the markets, having a solid understanding of liquidity is very important if you want to make profits from the market. It's important to trade in markets with high liquidity, as these markets are more stable, and follow technical analysis more predictably.

Big financial institutions, use fakeouts to trap retail traders at liquidity levels. Hence, it important to understand how to trade liquidity levels. Whenever prices reach a liquidity level, there are only two things that can happen - it's either there's a reversal or a continuation.

Thus, it's important to know how to trade reversals and continuations at liquidity levels. Making use of Market Structure Break strategy, you can trade reversals better at liquidity level. And using Break Retest Break strategy, you'll be able to trade continuations better at liquidity levels.

Thanks