Liquidity

Module 7 picked out the swing highs and swing lows that count. Module 8 looks at what sits around them: resting orders. In ICT, that is liquidity, and price moves to go and get it.

Above and below

• Above a swing high: the stops of those who are short, and the buy orders of those waiting for the break. Once hit, they are all buys: buy-side liquidity.
• Below a swing low: the buyers’ stops and the sell orders of those waiting for the break. Once hit, they are sells: sell-side liquidity.

Why price goes for it

A large buyer needs sellers on the other side. Below a swing low, the buyers’ stops are so many sell orders: it can fill its position there without pushing price up against itself.

That is the ICT reading of wicks that pierce a level and come back. It says where price goes, not when.

Spotting it before the session

The most visible levels first: the previous day’s high and low, the Asian and London highs and lows, the swing highs and swing lows that count. The more obvious a level, the more orders around it.

Taking liquidity says nothing about which way price goes next: on the chart, New York takes both sides, one after the other.

Two swing highs at the same price make equal highs (EQH); two swing lows, equal lows (EQL). Classical analysis sees a double top, a solid resistance. ICT sees above all a reserve of stops.

Why two are worth more than one

Each time price stalls at the same place, new sellers step in, with their stop just above. The level is visible to everyone: the buy-side liquidity grows with every touch.

What makes a real pair

• Two clear swing highs, separated by a real pullback: at least four candles between them.
• At the same price: the gap is no more than a tenth of the average candle size.
• Nothing beyond in between: a level exceeded in the meantime is no longer intact.

A target, not a wall

Selling under equal highs in the hope they hold puts you where the stops are waiting. They work better as a target: as long as they are intact, price has a reason to go there.

Once they are taken, anything can happen: price may turn (step 41) or carry on, as on the chart.

A stop hunt: price goes beyond an obvious level, triggers the stops resting there, then heads back the other way. On the chart, a wick beyond the level and a close back on the other side.

Stop hunt or break?

• The break: price closes beyond the level and carries on. That is the BOS of step 35.
• The stop hunt: it goes beyond, closes back, and the next candles do not get back beyond.

At the moment the level gives way, the two look alike. The difference shows at the close, never during the wick.

Where to look for it

On the liquidity of steps 39 and 40: a London or previous-day low, equal lows. A hunt below a low serves a bullish reading; above a high, a bearish one.

What confirms it

Coming back is not enough. What gives it weight is what follows: a displacement the other way, a CHoCH or a CISD (module 7).

Often, price slips back below the level a few candles later and carries on: the wick was only a pause.

Not all liquidity is equal. Two tools help rank the levels: the hierarchy of swing highs, and liquidity pools.

STH, ITH, LTH

• STH (short-term high): a swing high price has never come back to test.
• ITH (intermediate-term high): a swing high that survived at least one return of price without breaking.
• LTH (long-term high): the one that survived the most returns, over a wider window.

Every return adds sellers and their stops: an ITH carries more orders than an STH. On the swing low side, they are STL, ITL, LTL.

Old does not mean important: a swing high several weeks old, never retested, is still an STH.

Liquidity pools

A pool is where stops pile up: equal highs, the previous day’s or week’s high, a session high. Several levels close together make one large pool.

The order of play

In an uptrend, price generally takes the STHs before the ITHs, and the ITHs before the LTHs. Aiming at a distant ITH with several STHs in the way means risking the move stopping short, on one of them.

The draw on liquidity (DOL) is the liquidity price is drawn towards: the target of the session or the week. The module ends here because it is the first question of any analysis: where is price going?

Choosing the target

• List the liquidity on both sides: the previous day’s highs and lows, equal highs and equal lows, intact ITHs and ITLs.
• Decide with the structure (module 7): bullish, look above; bearish, look below.
• Keep the nearest intact level in that direction.

In module 11, that choice becomes the model’s target.

A target, not a prediction

The DOL says where price has reasons to go, not when it will get there, nor whether it will. It often takes the liquidity on the other side first: that is the stop hunt of step 41.

Once it is reached

Liquidity that has been taken no longer draws. Price looks for the next one, or turns: that is often where you watch for a stop hunt the other way.