EURUSD (Liquidity Pools: A short Explainer)

14 gen

Liquidity Pools: A Short Explainer

A liquidity pool is an area where retail traders have pending buy/sell orders.

MM always needs to pair their buys with someone's sells, and vice versa - they 'engineer' liquidity.

If they want to go long, they create conditions whereby retail traders think the price is going lower.

If they want to go short, they create conditions whereby retail traders think the price is going higher


Price dips into liquidity pool (see the wick)

Reverses

Driving price below the swing low floods the market with liquidity for longs

How?

1. People who are long and have stops --> stops triggered --> stops become market orders to buy

2. Retail traders see 'support breaking' -> open shorts > MM sell their longs to them


Liquidity pool below the swing low

Swing lows & equal lows are high probability long liquidity pools

Market makers will target these price levels knowing

1. Retail traders already long have their stop-losses at/around swing lows

2. Swing lows seen as 'support' by retail traders

15 gen

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