Today, I want to share something that will help your trading, for those who are finding it hard to come up with a systematic way of entering their trades when trading.
FINDING LIQUIDITY LEVELS:
A liquidity level is a zone or region the price chart where there was a tug of war between buyers & sellers, before either the buyers won and drove price higher or the sellers won and drove price lower.
Liquidity levels are great for identifying entries, and they help you enter trades with very tight stop losses, thus giving you much better risk to reward ratios.
How To Find Them:
Once the market closes on Friday, I open up the weekly candle for that week and note the Open, High, Low and Closing prices and I draw them as four horizontal lines on my chart. Those lines will guide me as I trade in the coming week.
See the chart below for USDJPY. The red lines are the Open High Low Close prices for last week, 4 to 9th December 2016.
Next I switch down to the 4 hour charts and try to capture all the 4 hour candles of trading activity for that week. I then visually try to find all the swings for that week.
I try to find the places where stalled or reversed on the 4 hour charts. Typically, I don’t draw more than 4 to 5 lines.
By now, I should have a total of 8-10 lines. See the chart below.
The green lines are the 4 hour liquidity levels. The red lines are the weekly Open High Low Close levels.
I use the 4 hour candles because they visually capture the 3 major trading sessions (Asian, European and American sessions very easily.
Now, whenever I try to enter a trade based on my other analytical tools, I simply zoom down to the 1 minute chart to try and take a trade as close as possible to the closest liquidity level I drew earlier, so that I can put my stop loss behind that liquidity level.
The more liquidity levels I have between my entry price and my stop loss, the more confident I feel about my trade because I know that last week’s huge sellers or buyers will defend my stop loss.
This is not a trading strategy in itself. It is simply a trade entry method that can help you achieve tighter stops.
Try it with your existing system and see if it works for you.
Find below real time examples of how liquidity levels can help protect your stops.
Example 1: I entered a buy trade on USDJPY at 115.81. Pretty late entry though.
(I actually got to my trading desk late this morning cos my wife and I attended a dinner last night and got back late so I overslept this morning. If not there were better liquidity levels where I could have entered much earlier with better execution).
Price moved up 25+ pips immediately cos that level is a liquidity level. Liquidity levels help you achieve little or no drawdowns.
You either get stopped out immediately or price moves fast in your favor.
Look at how price then retraced but was held at that same 115.81 level and the reversed back up.
Of course this is a text book example of liquidity levels, it isn’t always this crisp.
Example 2: I entered a buy trade on EURUSD at 1.0601
Example 3: I entered a sell trade on USDJPY at 115.15
If you do not have a trading system with an edge, then I recommend that you take my Value Flow Bonds & Bullion Foundation Course. This course gives you a solid foundation for successful forex trading.