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  • Writer's pictureVasily Trader

7 Types of Liquidity in Forex Trading SMC

types of liquidity in forex trading smc

In the today's article, we will discuss 7 types of liquidity in Forex trading, every SMC trader must know.

Liquidity Zones

Always remember, that Even the highly liquid market like Forex does not have a constant, stable liquidity.

While some price levels will lack the interest of the market participants, the trading orders tend to concentrate on specific price levels.

The clusters of price levels with a high concentration of trading orders will be called the liquidity zones.

Your ability to recognize and distinguish liquidity zones is essential for profitable trading.

Here are main type of liquidity zones.

1. Liquidity Based on Fibonacci Zones

The zones based on Fibonacci levels can concentrate the market liquidity.

Classic Fibonacci retracement levels: 0,382; 0,5; 0,618; 0.786 

and Fibonacci Extension levels: 1,272; 1,414; 1,618 attract market participants and the liquidity.

liquidity zone based on fibonacci

Above, you can see an example of a liquidity zone based on 0,618 retracement level. The reaction of the price to that Fib.level clearly indicate the concentration of liquidity around that.

Also, there are specific areas on a price chart where Fibonacci levels of different impulse legs will match.

Such zones will be called Fibonacci confluence zones.

Fibonacci confluence zones will be more significant Fibonacci based liquidity zones.

liquidity zone based on fibonacci confluence

Above, is the example of a confluence zone that is based on 0,618 and 0,5 retracement levels of 2 impulses.

The underlined area is a perfect example of a significant liquidity zone that serves as the magnet for the price.

2. Liquidity Based on Psychological Zones

Psychological zones, based on psychological price levels and round numbers, quite often concentrate the market liquidity.

liquidity zone based on psychological level

Look at a psychological level on WTI Crude Oil. 80.0 level composes a significant liquidity zones that proved its significance by multiple tests and strong bullish and bearish reactions to that.

3. Volume Based Zones

The analysis of market volumes with different technical indicators can show the liquidity zones where high trading volumes concentrate.

One of such indicators is Volume Profile.

liquidity zone based on volume analysis

On the right side of the chart, Volume Profile indicate the concentration of trading volumes on different price levels.

Volume spikes will show us the liquidity zones.

4. Historic Zones

Historic liquidity zones will be the areas on a price chart based on historically significant price levels.

Market participants pay close attention to the price levels that were respected by the market in the past. For that reason, such levels attract the market liquidity.

liquidity zone based on price action

Above, you can see a historically significant price level on Silver.

It will compose an important liquidity zone.

5. Trend Lined Based Zones

Quite often, historically significant falling or rising trend lines can compose the liquidity zones.

liquidity zone based on trend line

Above is the example of an important rising trend line on GBPJPY pair.

Because of its historical significance, it will attract the market liquidity.

Trend lined based liquidity zone will be also called a floating liquidity area because it moves with time.

6. Technical Indicators Based Zones

Popular technical indicators may attract the market liquidity.

For example, universally applied Moving Average can concentrate huge trading volumes.

liquidity zone based on moving average

In the example above, a floating area around a commonly applied Simple Moving Average with 50 length, acts as a significant liquidity zone on EURJPY.

7. Confluence Zones

Confluence zones are the liquidity zones based on a confluence of liquidity zones of different types.

For example, a match between historic zones, Fibonacci zones and volume based zones.

Such liquidity zones are considered to be the most significant.

liquidity zones confluence

Look at the underlined liquidity zone on US100 index.

It is based on a historical price action, psychological level 17000, significant volume concentration indicated by volume indicator and 618 Fibonacci retracement.

Always remember a simple rule: the more different liquidity zone types match within a single area, the more significant is the confluence zone.

Your ability to recognize the significant liquidity zones is essential for predicting the market movements and recognition of important reversal areas.

Liquidity zones are the integral element of various trading strategies. Its identification and recognition is a core stone of technical analysis.

Study that with care and learn by heart all the liquidity types that we discussed today.


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