Liquidity refers to how active a market is. It is determined by the amount of traders trading and the total volume they’re trading. One reason the foreign exchange market is so liquid is because it’s a very deep market, with nearly $6 trillion turnover each day.
Liquidity is a settlement in the market where smart money is used to take out sellers / buyers.
Smart money sees an area of money left in a pool where retail traders have seating. This is the same concept of looking at Higher Highs, Lower Lows, S/R being respected.
How to spot Liquidity
Spotting liquidity pools is actually quite simple. First lets go over what a settlement looks like? Well a settlement is seen as Swing Highs , Swing lows in the market. These areas are what can also be identified as liquidity pools.
Notice how each swing low respects a liquidity pool. These areas can be retested again. Which is where all of the other structural strategies can come into play, such as Support/Resistance, Supply/Demand, Major Key levels, instructional levels, Order blocks etc.…
How to trade Liquidity grabs
First we must know the overall bias. Try to spot this on the higher time frames. Once you establish your bias head to the smaller time frames to look for your liquidity pool.
Once we establish the market flow. Next we must look for imbalance within the rally (impulsive wave). To have an idea of where price can pull back to before creating new lows in the market.
Pay attention to how the market decided to pull back to an area of supply / imbalance . Which can also be seen as a liquidity pool.
Once price hits that area of imbalance or supply / demand from the impulsive wave. You are now able to look for your entries. Which is talked about in the Three Man Standing concept.
TTMS (The Three Man Standing) occurs once you get three phases in the market from your impulsive rally then using internal order flows to determine your accumulation / distribution areas within to then apply price action reaction for entries in the market. However, let’s first dig into each theory and concept.
Elliott Wave has two wave factors one being the motive 5 wave cycle which shows movement of a trend. And the other corrective 3 wave cycle which shows using shows a sideways trend. These 5 wave trends can be labeled as 1, 2, 3, 4, 5 while the corrective patterns can be labeled as a, b, and c. You can spot these patterns anywhere on the market.
Wyckoff concluded that the stock market goes into this cycle called Wyckoff price cycle also known as the Composite Man. Which really means it’s a man that studies us as if we were the result of one mains operation. Wyckoff goes into phases oversold (accumulation area) then goes into a markup which makes the demand greater than supply then overbought (distribution area) which goes into markdown making supply greater than demand.
Price flow reaction
What price flow reactions consist of are order flows and price patterns. We are able to take this concept to apply to our way of viewing the market.
The Three Man Standing Tools
While looking at the market we first must establish the 5 wave cycle. There are different ways we can apply to find the end of a 5 wave cycle. When trying to find a 5 wave trend we use the Fibonacci extension tool and the Fibonacci retracement tool.
To keep this simple we will show you what Fibonacci extensions are most common to hit. If you would like to learn more about Elliott Wavewe have a post here to check out.
Once you establish Wave 1 and Wave 2 you will draw your extension tool from the starting point of Wave 1 to the end of Wave 1 then to the end of Wave 2 to establish how long wave 3 can extend to which it can reach to 161 or 2618% Fibonacci levels.
If you would like to learn more about Elliott Wave please check out our post on Elliott Wave and how you can use this theory for trading.
Once you establish the end of Wave 3. Wave 4 can be measured by a sub-wave cycle of 3 waves known as A,B,C Zigzag or Flat pattern. In this example you’ll see a zig zag pattern using the Fibonacci retracement tool extending out to the 618% fib level.
Wave 5 can be measured by a set of 5 sub-waves and can meet anywhere from the 618% or 1% Fibonacci extension level. During the end of the 5 wave cycle this is usually where you will spot an ending diagonal pattern or a Price action pattern such as a Head & Shoulders.
Impulsive Wave 5
The 5 wave cycle is completed the next step is applying Wyckoff theory. We will be using Wyckoff theory in two different ways. Understanding that there is a price cycle in Wyckoff known as Accumulation leading to increase of supply with little demand. Noticed how the market has little of demand but lots of supply, which leads to a distribution. Well this cycle has every second of the day in the market.
Wyckoff Cycle Play of Action
We need to find Supply & Demand zones within the impulsive trend. The Trend determines the possibility of the next Wyckoff price cycle to occur.
We already established how the Elliott Wave theory can consist of 5 wave. Usually you can find 7 Supply and demand areas.
The Three Man Standing Entries:
The three man standing entries we look for are:
Price Action Patterns such as Head & Shoulders , Double Tops, Double Bottoms.
Elliott Wave ending diagonal patterns
We must have one of these to hit our zone level in order for us to look for entries.
“Even though there can be 7 point of interest levels we can narrow this down by applying higher time frame analyze or even using the Fibonacci retracement play which we talk about on the Fibonacci method here”
Notice how we removed all the other noise and only applied higher time frame demand & supply areas. We then wait on price to give us The Three Man Standing Entries method to look for aggressive entries.
What Time Frames To Look For Entries:
When looking for entries you can spot these using any higher or lower time frames demanding on which time frame you use to mark up your charts. So let’s say you’re marking up your charts on a Daily or 4 hour time frame. The best time frame to spot The Three Man Standing Entrieswould be any lower time frames such as the 1 hour 30 minute and even 15 minute time frames.
So now you understand that The Three Man Standing consist of three different concepts one being following the full Elliott Wave Theory cycle then next will be applying the Wyckoff price cycle and looking at price order flows to get your entries.