Chapter 1 · Part One
How Price Actually Moves
Price does not move randomly. It moves between pools of liquidity.
About 8 minutes
Every move in the market exists because someone needs to fill an order. Institutions cannot drop five hundred contracts at market without moving price against themselves. So they engineer moves into liquidity pools to get filled, then let price reverse.
Your job is to identify where that liquidity sits, when it gets taken, and how to position yourself on the right side of the reversal.
The IRL to ERL cycle
This is the engine behind every move, on every chart, on every timeframe.
IRL, internal range liquidity, means fair value gaps, order blocks and imbalances inside a range. This is where price finds equilibrium.
ERL, external range liquidity, means the highs and lows outside a range where stop losses and breakout orders cluster. This is where the liquidity sits.
ERL → IRL → ERL → IRL → ERL ...
Price seeks external liquidity by grabbing stops, returns to fair value by retracing into an imbalance, then seeks external liquidity on the other side. Over and over. Once you see this cycle, every candle makes sense: price is either reaching for liquidity or returning to fair value.
What fair value looks like on the candles
Internal range liquidity is an abstract phrase until you see it. A fair value gap is three candles where the middle one moves so hard that the first and third never overlap. The untouched space between them is the imbalance, and price tends to come back for it.
- 1Candle 1's high never reaches candle 3's low. They do not overlap, so the space between them is the gap.
- 2Candle 2 is the displacement. Big body, little wick.
- 1Candle 1's low never reaches candle 3's high. The untouched space between them is the gap.
Liquidity pools
Liquidity pools are where stop losses and pending orders cluster. The bigger the level, the more liquidity sits there.
Sell-side liquidity sits below lows, and two groups have resting orders there rather than one. Longs have their stop losses below the low, and breakout traders have sell orders waiting for the break. Both of those are sells. When price drops through, they fire at the same moment, and that flood of selling is what institutions buy into.
Buy-side liquidity sits above highs. The same two groups, mirrored. Shorts have their stops above the high, and breakout traders have buy orders waiting for the break. Both are buys. When price pushes through, that flood of buying is what institutions sell into.
That is why these levels hold so much more than they look like they should. It is not one group getting stopped out. It is two groups transacting in the same direction at the same moment, which is exactly the volume a large order needs to fill against.
Not all levels are equal
| Level | Liquidity | Reliability |
|---|---|---|
| Weekly high or low | Massive | Highest |
| Previous day high or low | Very strong | Very high |
| Equal highs or equal lows | Strong | High |
| Session highs or lows | Moderate | Moderate |
| Overnight high or low | Moderate | Moderate |
| Random swing points | Weak | Low |
When you are choosing which level to build a trade around, work down this table from the top. A setup off a previous day high is a different quality of trade to one off a random swing point, even if the pattern looks identical.
Check yourself
Price has been grinding sideways under an obvious previous day high. Where is the liquidity, and what does that tell you?
Before you move on
- You can explain the difference between IRL and ERL without looking
- You can say where stops sit relative to a high, and relative to a low
- You can rank two levels on a chart by how much liquidity they hold
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