Market makers & liquidity zones{14}

 

. Market makers & liquidity zones

Market makers

Who they are:

Market makers are large financial institutions or brokers that continuously post bid and ask prices on a trading platform. Their primary role is to provide liquidity by ensuring there is always a buyer and a seller in the market. They profit from the spread (the difference between bid and ask prices) and can influence price levels by placing large orders.

Key points:

·         Liquidity providers: their activity ensures that traders can always execute orders quickly.

·         Stop hunts: they may sometimes trigger clusters of stop-loss orders by pushing prices to levels where many retail traders have placed stops.

·         Influence on price: their large orders can create temporary price distortions, which savvy traders can monitor for potential opportunities.

 This diagram shows a price chart where a market maker is depicted placing large orders. Notice the clusters of stop-loss orders around key support and resistance levels-areas where market makers might trigger stops to create liquidity.

Liquidity zones

What they are:

Liquidity zones are areas on the price chart where a high concentration of orders (both stop-loss and pending orders) are clustered. These zones are often found near significant support and resistance levels or areas where the price has repeatedly reversed.

Key characteristics:

·         Order clustering: many traders place their orders at similar price levels, which create a dense area of liquidity.

·         Rapid movements: when the price reaches these zones, a cascade of orders can be triggered, often resulting in sudden, fast moves.

·         Visual identification: look for areas on the chart with multiple touches or reversals-the horizontal lines or zones where the price tends to bounce.

:

 This image highlights liquidity zones with shaded areas along the chart. The annotations indicate regions where past reversals have occurred ,suggesting where real  and institutional orders are likely concentrated.

 2. Order blocks & imbalance areas

Order blocks

Definition:

Order blocks are specific price ranges where significant institutional orders have been placed. They often represent the last bullish or bearish candle before a strong directional move. These areas can act as powerful support or resistance levels when revisited.

How to identify them:

·         Significant candles: look for a large candle that stands out-typically the last candle before the price makes a strong move.

·         Price consolidation: the area covered by that candle its high, low, and body often indicates where institutional traders accumulated in a bullish order block or distributed in a bearish order block positions.

Usage in trading:

·         Entry /exit zones: when the price revisits an order block, it may bounce off that area, providing potential entry or exit points.

·         Stop-loss placement: placing stops just beyond an order block can protect your trade the smart money decides to push through.

This chart shows an order block marked by a large candle highlighted in a rectangle the area represents where institutional orders were likely executed. When the price returns to this zone, it may face strong support or resistance.

Imbalance areas

Definition:

Imbalance areas-often referred to as fair value gaps-occur when the market moves very quickly through a price range, leaving little trading activity between consecutive candles. This creates a ‘’gap’’ where the normal order flow was not fully absorbed.

 Key characteristics

·         Rapid price moves: these gaps appear after strong moves where buyers or sellers dominate.

·         Potential target: price often returns to” fill” these gaps, making them useful for predicting reversals or continuation points.

·         Visual clue: look for spaces on your chart where consecutive candles do not overlap, indicating an imbalance between buyers and sellers.

Usage in trading:

·         Entry signals: if the price revisits an imbalance area, it can signal that the market is seeking to balance order flow, offering a potential entry or exit point.

·         Profit targets: these areas can serve as potential targets where the price might stall or reverse.

The image shows a clear gap between two sets of candlesticks, highlighted as an imbalance area. This gap represents a zone of rapid price movement where little trading occurred and may later serve as a reversal or target zone.

3. Combining the concepts

Integrating smart money tools with technical analysis

Confluence is key :

·         When an order block overlaps with a liquidity zone, the signal becomes much stronger.

·         If an imbalance area coincides with a known support or resistance level, it can serve as a powerful confirmation of a potential reversal.

Practical application

·         Entry: look for price approaching an order block that lies within a liquidity zone. Watch for reversal signals such as a bullish or bearish candlestick pattern before entering.

·         Stop-loss: place your stop-loss just beyond the order block or the edge of the liquidity zone to protect against a false breakout.

·         Take-profit: use the distance to the next significant liquidity zone or the opposite edge of an imbalance area as your profit target.

 Combined visual illustration:

 This composite image brings together market makers, liquidity zones. Order blocks, and imbalance areas on ne chart, each area is annotated to show how these elements overlap and interact, providing a holistic view of institutional trading activity.

 Final thoughts

 By understanding and marking these smart money concepts on your charts, you can align your trading decisions with the actions of institutional players. This not only improves the precision your entries and exits but also enhances your overall risk management strategy.

 Additional real –world example on trading view

 Example analysing GBP/USD on a daily chart

1. Identify liquidity zones:

o   Observation: notice that GBP/USD has repeatedly reversed 1.2300 and 1.2500.

o   Action: draw horizontal lines at these levels using trading view’s horizontal line tool.

 Horizontal lines drawn at 1.2300 and 1.2500 highlight liquidity zones where price has repeatedly reversed.

 2. Marking an order block:

 

 o   Observation: identify a large bearish candle around 1.2450 before a strong downward move.

   o   Action: use the rectangle tool to highlight the body of that candle, marking an order block.

A rectangle is drawn around a significant bearish candle, indicating a probable order block.

 3. Finding imbalance areas:

 

o   Observation: look for a gap or fair value gap between consecutive candles in a rapid move .for example, between 1.2500 and 1.2600.

o   Action: shade this area with the brush tool or rectangle tool to indicate the imbalance zone.

 A SHADED AREA SHOWS WHERE A RAPID MOVE LEFT A GAP, SIGNALING AN IMBALANCE AREA THAT MAY LATER ACT A REVERSAL TARGET.

 4. INTEGRATING CONFLUENCE:

o   OBSERVATION: NOTICE THE one of the liquidity zones coincides with the order block, while an imbalance area is nearby.

o   Action: label these areas using the text tool (e.g. liquidity zone,’’ ’’order block ‘’ ‘’ imbalance area ‘’).the overlapping signals suggest a strong potential for a reversal or continuation, making it an attractive trade setup.

Annotations show how liquidity zones, an order block, and an imbalance area overlap-strengthening the trading signal.

 5. Trade setup example:

o   Entry: if the price revisits the confluence area (e.g.at 1.2400) and forms a bullish reversal candlestick pattern, you might consider a long position.

o   Stop-loss: set the stop –loss just below the order block( e.g. Around 1.2350 )

o   Take-profit :use the next liquidity zone or the top of the imbalance area as a target (e.g. 1.2500)

 MT4 walkthrough

Example analysing USD/JPY on a daily chart

 1. Chart setup in MT4:

o   Open the USD/JPY DAILY CHART.

o   USE THE ‘’OBJECTS’’ TOOLBAR TO ACCESS DRAWING TOOLS.

 2. MARKING LIQUIDITY ZONES:

o   Action: draws horizontal lines at levels where price has reversed several times. For example, if you notice reversals near 110.50 and 111.00, draw horizontal lines at these levels.

  Horizontal lines drawn at 110.50 and 111.00 on the USD/JPY daily chart highlight liquidity zones.

  3. Identifying order block:

 o   Action: look for a significant candle (e.g.a large bullish candle before a drop) and use the ‘’rectangle’’ tool to mark its body.

  A rectangle highlights the order block where a major bullish candle was followed by a strong downward move.

 4. highlighting an imbalance area:

 o   Action: identify a gap between candles where little trading occurred .use the ‘’rectangle’’

 A shaded area indicates the imbalance (fair value gap) on the chart.

 5. Combining elements:

o   Action: add text labels to annotate the liquidity zones, order block, and imbalance area.

 

o   Confluence: look for areas where these elements overlap. For example, if an order block coincides with a liquidity zone, it reinforces the signal.

 Annotations on the MT4 CHART ILLUSTRATE THE OVERLAP OF LIQUIDITY ZONES, AN ORDER BLOCK, AND AN IMBALANCE AREA-FORMING A STRONG CONFLUENCE SIGNAL.

 6. PRACTICAL APPLICATION:

 o   Entry: enter a trade when price revisits the confluence zone and shows confirmation (e.g. reversal candlestick)

 o   Risk management: place stops just outside the order block to protect against false breakouts, and target the next significant liquidity zone as your take-profit level.

 Integrating into your daily routine

 1. Morning routine :

 o   Spend the first 15-30 minutes of your trading day scanning key currency pairs.

 

o   Use your established templates on trading view or MT4 TO QUICKLY MARK LIQUIDITY ZONES, ORDER BLOCKS, and imbalance areas.

 2. Pre-market analysis:

 

o   Review news events and economic calendars to see if any significant events might impact these smart money areas.

o   Update your charts with annotations for any new zones formed overnight.

 3. Active monitoring:

o   During the trading session, monitor how to price interacts with these marked zones.

o   Set alerts on trading view or MT4 to notify you when price reaches these key levels.

 4.post –market review:

at the end of the day, review your charts and journal your observations .note whether the price respected your marked zones, and adjust your technique accordingly.

 Following these additional real-world examples and step –by –step walkthroughs on both trading view and MT4, you can deepen your understanding of smart money concepts and better integrate them into your daily trading routine.