Good day everyone. Thanks to @cryptokraze for such a wonderful lecture on Trading Liquidity Levels The Right Way. I will be doing the homework from the lecture, so sit back and look for somewhere quite quiet and comfortable as you read through this amazing article I created just for you(😉). Let's get started!!!
Question 1: What is your understanding of the Liquidity Level
From my understanding of liquidity level, I can say that, Liquidity levels are those significant areas where there are a lot of orders placed, either buy or sell orders, in order to take profit from trades or stop loss.
To understand this concept better, I will try to create a illustration to you. Whenever you are trading an asset, there are resistance points and supports points, right? i.e the highest price point and lowest price point on a trading chart. Lots of take profit orders are placed slightly about resistance point, because traders want to break the resistance and make some more profits, while stop losses are mostly placed just below the support point, in order to safeguard funds. These points are known as liquidity levels.
Liquidity levels are those tiny points of candle sticks that breaks out of both resistance levels and support levels. Let me illustrate this to you visually on BCH/USDT chart below, for better understanding on Liquidity levels.
From the image above, you can clearly see that liquidity levels are the tiny tips of candlesticks that breaks resistance levels and support levels. I hope with the image above, you now understand the concept of Liquidity levels.
Question 2: Explain the reasons why traders got trapped in Fakeouts
Before I will explain the reasons why traders always get trapped in fakeouts, I will have to explain the concept of Fakeouts, so you can understand why traders get trapped in it.
Fakeouts occurs when the price is expected to move in a particular direction and it does the direct opposite. Fakeouts normally occurs around the liquidity levels. You as a trader, feels the price is about to break either the resistance or the supports levels, and you put in a trade, and boom!!! The price goes the exact opposite direction.
Traders normally get trapped in fakeouts because fakeouts looks like genuine breaks, because they first break the support or resistance levels, which creates some kind of vibe for traders to dig in and make some cool profits and it goes against their price prediction.
That's why the main reason why traders fall victim to fakeouts is because they never wait for trend confirmation. They get anxious as soon as a breakout occurs and don't wait for trend confirmation, and fall victim to fakeouts which are mainly manipulated by institutional investors.
From this ADA/USDT chart above, you can see that, the price broke the resistance liquidity levels and then went the opposite direction. That's a clear example of a resistance liquidity levels Fakeout. Traders thought it was an upward price movement, boom!!! It changed to a downward price movement, thus, retail traders made losses while big whales and institutional investors made profits because they manipulated the market to their favor.
From this ADA/USDT chart above, you can see that, the price broke the support liquidity levels and then went the complete opposite direction. That's a clear example of a support liquidity levels Fakeout. Traders thought it was a downward price movement, boom!!! It changed to an upward price movement, thus, retail traders made losses while big whales and institutional investors made profits because they manipulated the market to their favor.
Question 3: How you can trade the Liquidity Levels the right way? Write the trade criteria for Liquidity Levels Trading
To be able to trade the Liquidity Levels the right way adequately, you should be able to know how to avoid Fakeouts, and how can you avoid fakeouts? You can avoid fakeouts through Trend confirmation and I know of two very reliable Trend confirmation strategies, which are Market Structure Breakout(MSB) strategy and Break Retest Break(BRB) strategy.
Break Retest Break Strategy
I will be starting off with BRB strategy for trend confirmation in order to trade the Liquidity levels the right way, more adequately.
Trend Confirmation
To confirm trends using the BRB, you have to follow the criteria below. Trend confirmation can also be known as Trade entry criteria.
Mark your resistance or support liquidity levels, depending if you are entering either a buy trade or a sell trade.
Wait for breakout on your marked resistance or support liquidity levels.
Wait for it to hits swing high and retest back, but ensure it doesn't go below your support or resistance liqiuidity level.
Wait for it break out of the Swing high or low points after the retest.
If this occurs, then, you have confirmed the trend of the market. Take a look at the image below for more understanding.
Trade Criteria
To make an actual trade, you have to ensure you place your stop loss, to avoid losing your funds and set a Take profit. Below are trade criteria using BRB strategy when trading liquidity levels the right way.
Enter your trade as soon as you notice, that the price has broken the Swing High or Low points.
Set your Stop Loss just above your support levels or below your resistance levels.
Set your Take Profit using a 1:1 Reward/Ratio
Market Structure Breakout Strategy
The second trend confirmation strategy is the MSB. Knowing how this strategy works, will ensure greater trade success when trading Liquidity levels the right way.
Trend Confirmation
To confirm trends using the MSB, you have to follow the criteria below. Trend confirmation can also be known as Trade entry criteria.
You have to look out for a zigzag downward or upward price movement, depending if you entering either a sell or a buy trade.
There should be a price reversal i.e the price should change direction and go the opposite direction.
Then map out a market structure neckline.
Wait for the price to breaks pass the market structure neckline.
If this occurs, i.e the price breaks pass the market structure neckline, then, you have confirmed the trend of the market. Take a look at the image below for more understanding.
Trade Criteria
To make an actual trade, you have to ensure you place your stop loss, to avoid losing your funds and set a Take profit. Below are trade criteria using MSB strategy when trading liquidity levels the right way.
Enter your trade as soon as the price breaks the market structure neckline.
Set your Stop Loss just above Lower High Point or below Higher Low Point.
Set your Take Profit using a 1:1 Reward Ratio
Question 4: Draw Liquidity levels trade setups on 4 Crypto Assets
Crypto Asset 1 - TRX/USDT (BRB Strategy - Buy Setup)
Crypto Asset 2 - XRP/USDT (MSB Strategy - Buy Setup)
Crypto Asset 3 - AXS/USDT (BRB Strategy - Sell Setup)
Crypto Asset 4 - DOGE/USDT (MSB Strategy - Sell Setup)
Conclusion
Trading Liquidity levels the right way, is a great trading strategy that expands one's trading mindset and helps one to always confirm trend's direction before entering into any trade. This is an awesome trading strategy, that every successful trader should have knowledge of.
Special thanks to you, @cryptokraze, for organizing this amazing class and giving this nice assignment, as it has helped me in understanding Trading Liquidity levels the right way.