Understanding the meaning of liquidity to liquidity pools: A complete guide to the core concepts of the cryptocurrency market

The concept of “liquidity” is something you often hear when trading cryptocurrencies. What exactly does it mean? Understanding liquidity clearly can make market movements much more transparent. Simply put, liquidity refers to the total amount of orders available at a certain price level for trading, and it’s always present at market highs and lows. Smart institutional investors leverage this liquidity to exploit market gaps.

What Exactly Is Liquidity – The Basics of Market Trading

To deepen your understanding of liquidity, it’s helpful to break it down into different types. Let’s start with the basic concept.

In the market, liquidity isn’t just about trading volume. Instead, it’s a measure of how much trading can happen instantly within a specific price range. For example, if the price of a coin is expected to drop to a certain level, investors often place stop-loss orders just below that level. The area where these stop-loss orders cluster is where liquidity is concentrated.

Distinguishing Between Buy and Sell Liquidity, the Hidden Meaning of Stop-Loss Points

Liquidity in the crypto market can be broadly divided into two categories:

Buy-side Liquidity (BSL): This refers to the level where traders looking to sell set their stop-loss orders. Usually, these are placed around previous high points (PDH: previous day high, PWH: previous week high, EH: equal high) or specific candlestick patterns (higher time frame). This zone acts as resistance, so when the price breaks through this level, many stop-loss orders are triggered, creating significant selling pressure.

Sell-side Liquidity (SSL): This is the level where traders intending to buy set their stop-loss orders. Typically located just below key support levels (PWL, PDL, EL, etc.), when the price falls to this level, buy stop-loss orders are activated. Since traders are willing to accept a price decline to trigger these orders, a large volume of trades can flood in suddenly when the price hits this zone.

In summary, buy-side liquidity forms above resistance levels, and sell-side liquidity forms below support levels. When the market breaks through these liquidity zones, stop-loss orders are explosively triggered, causing rapid price movements.

Market Movements Seen Through External and Internal Liquidity

The market essentially oscillates between external and internal liquidity.

External liquidity refers to the highest and lowest points of the entire correction range. When buy-side liquidity exceeds the upper boundary and sell-side liquidity is below the lower boundary, the market is in this zone.

Internal liquidity involves the pressure and support levels within the correction range. These are the stop-loss points set by traders operating within the range.

Understanding these two concepts helps clarify why the market moves in certain directions.

The Relationship Between Liquidity Pools and Smart Money – The Structure of Market Manipulation

So, what is a liquidity pool? Simply put, it’s a collection of large unfilled orders clustered at specific price levels. When makers (order providers) supply liquidity, takers (order executors) can quickly complete trades.

A key pattern here is the “Liquidity Raid.” Smart money, often composed of institutional investors, knows exactly where retail traders have placed large stop-loss orders. They recognize these points as liquidity clusters.

For example, if a certain price level is widely regarded as a critical support among retail traders, many will place stop-loss orders just below it. This area becomes a liquidity pool. Smart money manipulates the price to touch these stop-loss points, triggering massive liquidity in an instant. As the price swings sharply in a short period, retail traders’ stop-losses are executed sequentially. Afterwards, smart money absorbs these sell orders at lower prices, combining repeated manipulation with positive catalysts to push the price up and profit.

Market trading is akin to trading human psychology. Before trading, it’s crucial to assess whether the current market favors buyers or sellers. Smart money always seeks the side with the greater potential profit. While this process may seem straightforward, it’s complex and often involves oscillations and noise, with larger trends emerging from the chaos.

Ultimately, the market moves around liquidity, and investors’ funds flow between different groups based on volatility. Understanding the meaning of liquidity and its relationship with liquidity pools allows you to grasp why the market moves the way it does on a deeper level.