We often see the word "liquidity" used in analysis. So what is order liquidity? What is liquidity? Below I will explain what it is and how to use it in trading

So what does “liquidity” mean? (Liquidity)

Liquidity refers to the extent to which an asset or security can be converted into cash or other liquid assets at relatively low cost and time. In finance, liquidity is a measure of how easily an asset or security can be bought and sold in the market.

Highly liquid assets or securities are easily bought and sold in the market and experience less price fluctuations. Markets with high liquidity usually have a large number of buyers and sellers, active trading, and buyers and sellers can quickly complete transactions without having a significant impact on the price. This type of market typically has a lower bid-ask spread, which is a smaller difference between the bid and ask prices.

In contrast, illiquid assets or securities are difficult to buy and sell in the market and experience high price fluctuations. Markets with low liquidity usually have fewer buyers and sellers, and transactions are less active. Buyers and sellers may need to spend more time and cost to complete transactions. This type of market typically has a higher bid-ask spread, where the difference between the bid and ask prices is larger.

Obviously these three explanations are correct, so the last one is the most useful.

The levels I draw are usually important pivots (reversal areas) whose highs have not been touched in a while. This means there is likely to be a large amount of stop loss there. Because these are the clearest levels of failure for most people. In this case, the price keeps making lower highs, so these highs remain untouched. We can conclude that above these highs, bears have placed massive stops. This means that anything above that level triggers these stops and results in large buying volumes.

Why do we reach these levels?

This is because prices often seem to seek liquidity. If you want to fill a large number of orders, it is easier to push the price higher into these areas where there is a lot of liquidity. The opposite is true for bulls.

For example, if you push the price above these highs, you'll see buying volume coming from:

1. Trigger short-term stop loss/forced liquidation.

2. Breakout traders buy on a breakout of the previous lower high.

After that, one of two things happens:

1. If volume is very high, we will often see a large short squeeze occur, which can extend quite high, forming a good rally. These short squeezes can cause a snowball effect, sending the price higher with each breakout.

2. If you don’t continue to increase the volume. Or deliberately pushing the price to these levels just to sell the buying volume. We often see these highs being broken and then reversing, ultimately leading to a larger decline. We also call this Swing failure mode.

Whatever happens is situational.

For example, when the previous cycle’s all-time high of $20,000 was breached. The price experienced a huge short squeeze and has never come back to retest this level to date. This is due to the intense buying pressure that existed on a breakout of this level. Of course, all of this can also happen the other way around. Untouched lows? There can be a lot of liquidity when it comes to stop loss placement on long positions. Selling pressure is expected to occur whenever the price breaks above this level.

I think it gives you a good way to see things from another perspective. These levels are not considered "resistance or support". It's usually much more than that. Therefore, orders and K-lines can be simply understood as rivers, and the flow of orders is based on changes in demand and supply.