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Studying the Reasons for Price Reversal around Liquidity Pools
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Studying the Reasons for Price Reversal around Liquidity Pools

  #1 (permalink)
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Studying the Reasons for Price Reversal around Liquidity Pools

An Indian trader who has a very nice blog has raised this question on his blog. Since I find this very interesting, so I thought about sharing it here "with his permission" .


Quoting 
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Look at the above picture. You might have seen this pattern many times.

Market is in a bull trend. It pull backs and makes a low at point A. Afterwards it goes up and later returns to the same price level and print a beautiful pin bar.

As a trader what will be your action in this area?

Some possibilities are
1.You will keep a stop loss order just below point A if you are holding long position
2.You will sell just below point A expecting a breakout to the down side
3.You will go long above the pin bar with a stop loss below the candle

Will you buy at the circled area? Who bought there? Who absorbed both stop loss selling and breakout selling? Why?

I have read tons of materials on trading. So far I have not seen any authors, bloggers or traders recommending to buy at the circled area.Then who bought here ?

Please share your opinion .


His second post on this -


Quoting 
Usual answer is that "Smart money is buying " But Why ?
So far I have not seen any system or traders recommending to buy at the marked area. But somebody is buying . Who ? What is their game plan ?

Of course you can draw many MA, EMA, Fibs, Trend lines. Gann lines, some wave counts etc and put the blame on them. But that is only an excuse.

Liquidity Pools -

Quoting 
Now think about the above situation. Everybody knows a lot of sell orders exists below the previous support. There exists a "Liquidity Pool" .Where else can Big Money hide their buy orders ? Most of the retailers will end up providing liquidity to Big Money.

Market is a living organism. First priority of the Market is to ensure its own survival. Once the orders dry up it will move towards a "Liquidity Pool" where a lot of orders exist.Market will shake out many traders and will create order flow on its own.

Always pay attention to "Liquidity Pools". You will get a lot of trading opportunities around these areas.

PS :
Edit: I have changed the title of the thread as suggested by Mike. And have added the point about Liquidity Pools.


Last edited by ab456; January 3rd, 2013 at 12:34 PM. Reason: added info and changed thread title
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  #3 (permalink)
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Have a look at Wyckoff. Looks like a spring...
Also it could be classified simply as a failed breakout, you see it quite often in ranges.

vvhg

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I always buy at the tail, this is one of the core techniques I use day and night...
for me, this qualifies as a double bottom, plus bottoming tail on heavy volume.
More aggressively, I buy on the candle following the bottoming tail, after a retrace to at least 50% of the tail size.
If my strategy fails, and it does 20% to 30% of the times, then my stop is a mental stop, if the following bar closes below the tail's bottom.

Successful people will do what unsuccessful people won't or can't do!
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  #5 (permalink)
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Thanks for your replies

Posting here the original 1 min chart of this occurrence -

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Last edited by ab456; January 2nd, 2013 at 01:06 PM. Reason: typo
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The event allows traders to buy at a discounted price. They buy from the risk transfer of weak hands closing their long positions. The irony of course is that they initiate or add to the selling to create the unwinding, which they are then buying from. They manipulate the market in order to profit. It is not illegal, but it is the reality. They also are buying from new initiating shorts who are selling a break below prior support. This is a game that is played every day, and it is done because it works. It is a game that can only be (relatively) guaranteed to be won by those playing with very large sums of money, because they have actual market impact. However, once their activity is seen, then piggybackers can more safely join in and benefit. This is how the market works, and it is the classical transfer of funds from one group to another. If you think in terms of traditional chart patterns, it is what happens on the last leg down of a 'bull flat' just before it breaks up. Failed break down, trap some, then cause them to drive it up with their stops. Wash, rinse, repeat. This is not theory or speculation, it is what happens.

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josh View Post
The event allows traders to buy at a discounted price. They buy from the risk transfer of weak hands closing their long positions. The irony of course is that they initiate or add to the selling to create the unwinding, which they are then buying from. They manipulate the market in order to profit. It is not illegal, but it is the reality. They also are buying from new initiating shorts who are selling a break below prior support. This is a game that is played every day, and it is done because it works. It is a game that can only be (relatively) guaranteed to be won by those playing with very large sums of money, because they have actual market impact. However, once their activity is seen, then piggybackers can more safely join in and benefit. This is how the market works, and it is the classical transfer of funds from one group to another. If you think in terms of traditional chart patterns, it is what happens on the last leg down of a 'bull flat' just before it breaks up. Failed break down, trap some, then cause them to drive it up with their stops. Wash, rinse, repeat. This is not theory or speculation, it is what happens.

Thanks to you all, for sharing your opinions .

josh, if we look deeper into these 2-3 bars which are below that blue horizontal line , with higher volume -
What kind of action do you think, will be visible in Cumulative Delta or other delta type indicators / analysis ?
Can we get some clues from there, to gauge about the probabilities of price turning up from there, so that we can then take a benefit from this anticipation. " I am in no way saying that there would be an ABSOLUTE GUARANTEE that the price will definitely turn up from there, I am simply talking in the terms of measuring the probabilities somehow.

Let us assume that this "classical transfer of funds from one group to another" happened in 3 red bars which are just below that blue horizontal line. While most others were selling, "This Smart Group" was on the buying side. Now how would this thing reflect in the Delta or any other tools. Is there some way to properly quantify it, so that we can then create some Alerts etc. which will hint us about a similar opportunity being created in real time.

Any ideas are most welcome.

Thanks

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"Food for thought" - no one will ever find this thread again because of the way it is labeled has nothing to do with accurately describing the thread contents.

Mike

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Fadi View Post
I always buy at the tail, this is one of the core techniques I use day and night...
for me, this qualifies as a double bottom, plus bottoming tail on heavy volume.
More aggressively, I buy on the candle following the bottoming tail, after a retrace to at least 50% of the tail size.
If my strategy fails, and it does 20% to 30% of the times, then my stop is a mental stop, if the following bar closes below the tail's bottom.

Thanks Fadi, looks like a nice setup, the way you have explained it.
Do you take such trades just based on the Candle Formations alone or you pay attention to some other conditions / indicator values, as well.

And any comment regarding the frequency of such setups on your favorite instruments GC, CL, 6E, ZB.
Have you noticed this kind of phenomenon happening more often in one particular instrument, compared with others, or does it look like to be a common pattern in most of them ?

Thanks for your input.

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Big Mike View Post
"Food for thought" - no one will ever find this thread again because of the way it is labeled has nothing to do with accurately describing the thread contents.

Mike

I am sorry Mike, and I agree with your statement. I just took the title as it is from the original post which was made by another trader "as I explained it in the first post." He labeled it originally as "Food for thought" in his blog post, and then later on added more details on this topic by the name of "Liquidity Pools".

I am posting the original links to both those posts now -

Nifty Nirvana: Food For Thought
Nifty Nirvana: Liquidity Pools -- my comments about this futures.io (formerly BMT) Thread are given at the very bottom of this blog page in the comments section. I told him that futures.io (formerly BMT) is the best place to post such discussions, as the other forums where he posted, failed to generate any good discussion on this topic.

Please feel free to RENAME it with an appropriate name, as the OP has asked me to post it with proper editing, so the title could be easily renamed.

I am sorry for any confusion created with that title.

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