Crypto Academy / Season 3 / Week 5 - Homework Post for @cryptokraze | Trading Liquidity Levels The Right Way

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QUESTION 1:

ANSWER 1:

Before we discuss what is liquidity levels let's understand what is liquidity, Liquidity: The liquidity in terms of trading means how easily the asset get converted into cash without influencing the market price of the asset, How this can be achieved without the altering the value of asset. If we look at the order book of a crypto currency pair we can see there are so many buy and sell orders that are getting fulfill, this flowing of cash in the market determine the liquidity level of that crypto pair.

Low Liquidity levels means the market is more volatile where as High Liquidity levels means the market is somewhat stable.

Example

Let's see an example to identify the liquidity level on the chart of pair BTCUSDT with 1D time frame.

As we can see in the above chart provided on 20 July 2021 and 5 August 2021 liquidity level is very low means that the number of buy orders are more than the selling orders hence cash is flowing in the market whereas on 1 August 2021 and 26 July 2021 the liquidity levels are high means that the number of Sell orders are more that the buy orders hence cash is flowing out of the market. It leads to the trend reversal and creates a liquidity level.

QUESTION 2:

ANSWER 2:

Fakeouts occurs when a big financial institution or a team manipulate the price of the market by injecting money or taking out money from the market in order to trigger the stop loss orders of other small traders, so that the big financial institution or the team who did this can Generate profit. Fakeouts generally occur at the resistance and support levels of the chart.

• Fakeouts are the situation when a trader enters the market or want to exit the market and he is expecting the price to move in a direction but it fails to do so.

• Some traders get stuck in the trade leading to a large amount of loss in their asset.

How this exactily works.

When price reaches a liquidity level where a small trader have a intension to buy or sell asset in order to generate profit, Then big financial institution try to manipulate the price and try to trigger the stop loss order set by the small traders so that the small trader can exit or enter the market, These stop loss orders are set just above or below the liquidity levels.

In order to do this financial institution inject large amount of money in the market or take out their large amount of money from the market, due to this price get manipulated and once it reaches the level where small traders placed their stop loss order, they get fulfilled hence small traders enter the market or exit according to the situation.

Big financial institution manipulate the price hence creates a significant liquidity in the market, Due to this Small trader enter or exit the market in order to generate profit but this is a trap created by big financial institution hence their stop loss order get executed leading them in a great loss.

Example

• When Trader Want to Enter the Market.

In the above provided chart screenshot of BTCUSDT we can see on 29 July 2021 the liquidity level get created and then a fakeouts is created and the small trader have a mindset to enter the market as the trend is moving upward but after some time the trend shows reversal.

This leads to the triggering of stop loss order placed just near the liquidity level, Traders places stop losses in order to minimize the loss in case their trade fails, So that they can again enter the market as next setup is created, When stop loss is hit they already made a huge loss. This is an example of fakeout.

• When Trader Want to Exit the Market.

In the above provided chart screenshot of BTCUSDT we can see on 22 Feb 2021 the liquidity level get created and then a fakeouts is created and the small trader have a mindset to exit the market as the trend is moving downward but after sometime the trend shows reversal.

This leads to the triggering of stop loss order placed near the liquidity level, traders places stop losses in order to minimize the loss in case their trade fails, So that they can again enter the market as next setup is created, when stop loss is hit they already made a huge loss. This is an example of fakeout

QUESTION 3:

ANSWER 3:

Let's discuss how we can trade the liquidity level the right way in order to maximize the profit and minimize the losses, First we need to figure out the liquidity levels and then we have two different strategies to work with that are Market Structure Break(MSB) and Break Reset Break(BRB). If the price reaches the liquidity level then the price will either follow reversal trend or may reset and follow the same trend. To enter or exit the market we can use these two strategies.

• Let's discuss the strategy we use.

First we need to figure out the liquidity levels, After figuring out liquidity level we should wait and figure out which trading strategy out of MSB and BRB can be applied on the situation, If the situation gets created as the MSR strategy then we can use the MSR for buying and selling and If the situation gets created as the BRB strategy then we can use the BRB for buying and selling.

Let's Discuss Both the strategies in details.

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Market Structure Break.

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For Buying Asset using the MSR strategy.

First of all we need to figure out and mark the liquidity level, After that we need to wait for the the trend to show the market structure break strategy conditions, For buying the liquidity should be in favor of the buying situation. If we spot the MSR structure we should start our steps to buy the asset, For buying we should check if the trend is following the downtrend, Now as we discussed in the MSR strategy for buying we should get a higher low after a series of lower lows, Ones this situation is spotted we should make a neckline after higher low is formed, Now we should wait until a fresh candle stick is formed above the neckline, Now we should enter the market as soon as new candle stick is formed above the neckline.

Example:

In the above example of BTCUSDT with 1 day time frame we can see the continuous lower lows and after that a higher low is formed hence we need to create a neckline and whenever the new candle stick is created above the neckline we will enter the market.

For Selling Asset using the MSR strategy.

First of all we need to figure out and mark the liquidity level, After that we need to wait for the trend to show the market structure break strategy conditions, For buying the liquidity should be in favor of the selling situation. if we spot the MSR structure we should start our steps of selling the asset, For selling we should check if the trend is following the uptrend, Now as we discussed in the MSR strategy for selling we should get a lower high after a series of higher high, Ones this situation is spotted we should wait until a fresh candle stick is formed below the neckline, Now we should enter the market as soon as new candle stick is formed below the neckline.

Example:

In the above example of BTCUSDT with 1 day time frame we can see the continuous higher high and after that a lower high is formed hence we need to create a neckline and whenever the new candle stick is created above the neckline we will enter the market.

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Break Reset Break.

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For Buying Asset using the BRB strategy.

First of all we need to figure out the liquidity level, After that we need to wait for the trend to show the break reset break strategy conditions, For buying the liquidity must be in selling situation or we can say higher level of candle. It indicates a fakeout, Now after that if we spot the BRB structure, We should start pur steps to enter the market, Our higher liquidity level will be considered as a resistance line, Now we should wait for the trend to cross the resistance line, Now after that uptrend we should wait for the trend to reverse and then after reset the trend should again start moving upward, as it again crosses the resistance level we should enter the market.

Example:

For Selling Asset using the BRB strategy.

First of all we need to figure out the liquidity level, After that we need to wait for the trend to show the break reset break strategy conditions,Fpr selling the liquidity mush be in buying situation or we can say lower level of candle. it indicates a fakeout, Now after that if we spot a BRB structure, we should start our steps to take exit from the market, Our lower liquidity level will be considered as support line, Now we should wait for the trend to reverse and after reset the trend should again start moving downward, as it again crosses below the support line we should take exit from the market.

Example:

QUESTION 4:

ANSWER 4:

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Liquidity Level setup on 4 crypto assets for buying.

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• BRB on BTCUSDT for Buying
  

  
  
  

• BRB on ETHUSDT for Buying
  

  
  
  

• MSR on BATUSDT for Buying
  

  
  
  

• MSR on XRPUSDT for Buying
  

  
  
  

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Liquidity Level setup on 4 crypto assets for selling.

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• MSR on BTCUSDT for Selling
  

  
  
  

• MSR on ETHUSDT for Selling
  

  
  
  

• BRB on BATUSDT for Selling
  

  
  
  

• BRB on XRPUSDT for Selling
  

  
  
  

Conclusion

While doing research and work regarding this homework I learnt what is liquidity levels and what is the right and safe method to trade using the liquidity levels, The liquidity in terms of trading means how easily the asset get converted into cash, We have learnt how fakeout are created by big financial institutes and they try to manipulate the price in order to trigger the stop loss order of small traders and we also discussed how to tackle this problem using the liquidity levels and using the MSR and BRB strategies, We try to show the use of liquidity levels in trading.

Thank you