The Hidden Force in Trading Markets: A Deep Understanding of Liquidity and Liquidity Pools

In the world of crypto trading, liquidity is an omnipresent yet easily overlooked concept. Many traders only realize after losses that they are actually being controlled by the market’s liquidity structure.

Liquidity Pools: The Concrete Manifestation of Market Liquidity

To understand how liquidity operates, first recognize what a liquidity pool is. Simply put, a liquidity pool is a collection of large pending orders concentrated within a specific price range. Makers provide liquidity, enabling Takers to execute trades quickly. This seems fair, but in reality, it conceals a zero-sum game.

Types of Liquidity: The Three Dimensions of Market Operation

Seller-side Liquidity (SSL) and Market Support Levels

First, look at seller-side liquidity. When traders buying an asset set stop-loss orders below support levels, these points form a concentrated liquidity zone. For example, below the previous week’s low (PWL), previous day’s low (PDL), or equal lows (EL), a large number of stop-loss sell orders await triggering. The logic behind this setup is “If the price breaks support, I cut losses.” But because of this concentration, smart money can precisely target these zones.

Buyer-side Liquidity (BSL) and Technical Resistance

Next, consider buyer-side liquidity. When traders selling an asset place stop-buy orders above resistance levels, another layer of liquidity forms. Above the previous day’s high (PDH), previous week’s high (PWH), equal highs (EH), and high-level consolidation flags (HTF), a large number of pending buy stop-loss orders gather. These levels are originally defensive positions but often become targets for harvesting.

External Liquidity vs Internal Liquidity: The Binary Structure of Consolidation Zones

The market oscillates between these two types of liquidity. External liquidity refers to the extreme points of the consolidation range—buy-side liquidity accumulates above the high end, sell-side liquidity settles below the low end. Internal liquidity consists of the various support and resistance levels within the range. The essence of the market is to find pathways among these liquidity zones.

Liquidity Hunting: The Smart Money’s Predatory Game

This involves a key concept: Liquidity Raid.

Retail traders tend to place stop-loss orders at obvious technical levels, forming large liquidity pools. Smart money (mainly institutional investors) is well aware of this. Their operational logic is straightforward and brutal:

First, through price manipulation or hype via information campaigns, they push the price toward these dense stop-loss zones. When a large number of stop-loss orders are triggered, liquidity is instantly released, causing sharp price swings in a short period. It may look like market chaos, but it’s a carefully orchestrated plan.

Second, during the sell-off wave created by these stop-loss orders, smart money begins absorbing the forced-out chips at low levels. After multiple rounds of manipulation and absorption, their costs are significantly reduced.

Finally, with some positive news or technical signals, the price is pushed higher, allowing smart money to realize profits. Throughout this process, retail traders’ stop-loss points become precisely targeted.

The Nature of the Market: Psychological Battles and Capital Flows

Fundamentally, market trading is a battle of human nature. Therefore, a wise approach before participating is to observe whether the current market environment favors the bulls or the bears. Smart money typically targets the most profitable side, and this process often involves multiple intense fluctuations and虚虚实实 (deceptive and real) confrontations.

Markets fluctuate based on liquidity, and capital flows among participants based on volatility. Understanding the distribution and concentration of liquidity is essentially understanding the hunting strategies of smart money. When you learn to read liquidity, you can avoid becoming the prey of the hunters.