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Price Action Basics (Part 3)

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Price Action Basics

Have you ever been stopped out only to see that price moved in your direction after taking you out of your trade? If you have been trading for a long time it must have happened with you. You might’ve also felt that someone is watching your orders and trade opposite to you. Well, you are absolutely right! Before we start I would recommend you to go through our previous articles price action basics part 1 & part 2.

Liquidity

Suppose you want to buy a certain asset in a large quantity, there should be willing sellers available to sell that asset.
Likewise, if you need to sell, there must be buyers available. Saying an asset is “liquid” means it’s easy to find a counterpart. The opposite is “illiquid,” meaning it’s difficult to find a counterpart.

It’s liquidity that moves markets- Stanley Druckenmiller

Liquidity pool and Stop loss hunting

Before you get any ideas, stop hunting is not something a retail trader can do. Stop hunting exist! Yes, it does but it is not your broker that is doing it. Stop hunting is done by large players in the market. Who are these players? They are called ‘whales’. Usually, they are traders having enough capital to move the market in any direction they want.

Why do they do it? To take revenge against you? No no no, XD they do it to get their orders filled. It’s fine when there are willing buyers and sellers available. But if there is no available counterparty present, whales like big hedge funds, banks, institutional investors need liquidity to get their orders filled. Stop-loss orders represent liquidity in the market. All these stop-loss orders together form a ‘liquidity pool’.

There are broadly two kinds of liquidity when it comes to stop loss orders.

  • Buy stop liquidity
  • Sell stop liquidity

Buy stop liquidity

Buy stop liquidity is stop-loss orders above the market price. Suppose someone is shorting an asset at a price (say X). If he puts stop loss at a price above X (say Y). Then Y is a buy stop-loss order.

Now, if there are several such buy orders at a particular price or price range, that forms a liquidity pool of buy orders. So if a big player wants to sell that asset, he can move the market to that particular price or price range to get his sell orders filled.

Where do traders usually put buy stop losses?
  1. Above intraday Swing highs
  2. above equal highs
  3. Above previous or current daily high
  4. Above previous or current weekly high
  5. Above previous or current monthly high
  6. Above previous or currents quarterly high
  7. Above previous or current yearly high
download 11 2 edited - The TradeLog

Sell stop liquidity

Sell stop liquidity is stop-loss orders below the market price. Suppose someone is buying an asset at a price (say X). If he puts stop loss at a price below X (say Y). Then Y is a sell stop-loss order.

Now, if there are several such sell orders at a particular price or price range, that forms a liquidity pool of buy orders. So if a big player wants to buy that asset, he can move the market to that particular price or price range to get his buy orders filled.

Where do traders usually put sell stop losses?
  1. Below intraday Swing lows
  2. Below equal lows
  3. Below previous or current daily low
  4. Below previous or current weekly low
  5. Below previous or current monthly low
  6. Below previous or current quarterly low
  7. Below previous or current yearly low
download 12 1 edited - The TradeLog

What are you going to do with this information?

1. You must learn how to avoid stop hunting. Therefore, you need to know how the big players think and trade.

2. You must learn how to profit from stop hunting. you can take trades along with the big traders. Once you know how they do the stop hunting, you can join them and trade like a big player!

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Power Engineer by Profession, Trader by passion,A millennial having a billion dollar Crypto dream, Price action analyst/Trader, Commodity future Analyst, currency futures trader.

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