Liquidity Explained

Liquidity is the foundation of the Inner Circle Trading (ICT) and Smart Money Concepts (SMC) trading methodology. There are two types of liquidity: Buyside Liquidity (BSL) and Sellside Liquidity (SSL). BSL refers to the levels on the chart where short sellers have their stop losses set, while SSL refers to the levels where traders who are long have their stop losses set. These levels are typically found at highs/lows of ranges and are seen as areas where traders exit losing positions.

What is Buyside Liquidity (BSL)?

Buyside Liquidity (BSL) refers to the price levels where a large amount of pending buy orders are placed. These orders are placed by short sellers at their stop loss in order to close out their short positions. These buy stops are typically positioned above key levels, such as the highs of the previous day, week, and month. Understanding these levels are crucial, as they indicate points where significant amounts of buy orders may trigger, leading to a potential market reversal.

What is Sellside Liquidity (SSL)?

Sellside Liquidity (SSL) refers to the price levels where a large amount of pending sell orders are placed. These orders are placed by long-biased traders as their stop loss in order to close out their long positions. These sell stops are typically positioned below key levels, such as the lows of the previous day, week, and month. Understanding these levels are crucial, as they indicate points where significant amounts of sell orders may trigger, leading to a potential market reversal.

How to Identify Liquidity Levels in Trading

Indicator used in this image:

Key Levels | Flux Charts

How to Identify Buyside Liquidity (BSL)

To identify Buyside Liquidity (BSL) levels, mark out the following levels on your chart:

• Swing Highs

  A swing high is when price makes a high and is followed by a lower high.

• Previous Day High (PDH)

  PDH is important because it represents the highest price reached in the previous trading session, making it a key reference point for traders to assess market strength and potential reversal zones.

• Previous Week High (PWH)

  PWH is important because it reflects the highest price level achieved during the entire week, making it a critical benchmark for identifying potential resistance, trend continuation, or reversal points in the broader market context.

• Previous Month High (PMH)

  PMH is important because it marks the peak of price action over a longer timeframe, serving as a significant level that can influence market sentiment and provide insight into the strength of an ongoing trend. If this level is broken or fails to hold, it could be an early sign of a market reversal.

How to Identify Sellside Liquidity (SSL)

To identify Sellside Liquidity (SSL) levels, mark out the following levels on your chart:

• Swing Lows

  A swing low is when price makes a low and is followed by a higher low.

• Previous Day Low (PDL)

  PDL is important because it represents the lowest price reached in the previous trading session, making it a key reference point for traders to assess market strength and potential reversal zones.

• Previous Week Low (PWL)

  PWL is important because it reflects the lowest price level achieved during the entire week, making it a critical benchmark for identifying potential resistance, trend continuation, or reversal points in the broader market context.

• Previous Month Low (PML)

  PML is important because it marks the lowest area of price over a longer timeframe, serving as a significant level that can influence market sentiment and provide insight into the strength of an ongoing trend.