Best Liquidity Candles For Trading Explained
- VasilyTrader
- 2 days ago
- 4 min read
Today, I will explain how to identify market liquidity, supply and demand with candlestick analysis.
You will learn 4 powerful candles for accurately spotting liquidity on any market and any time frame.
I will explain the meaning of each candle and share a lot of examples.
Candle 1
The first reliable liquidity candlestick is called doji candle.
To understand why it indicates liquidity, you will need to comprehend the psychology of this pattern.
Candle Structure
First, let's study the structure of this candlestick.
Doji candle has a very particular shape with opening and closing levels being equal or almost equal.
Supply & Demand Analysis
Why doji is a liquidity candlestick?
To understand that, let me explain this candle from a supply and demand perspective.
Imagine that you see a strong bearish candle.
Why does such a candle form?
It happens because of the excess of the market supply.
Selling pressure is way stronger than buying interest; for that reason, the price is falling.
But if a doji candle forms afterward?
What does it signify?
It will mean that the excess of the market supply was finally absorbed by demand.
The market found equilibrium, testing a liquidity zone.
And doji candle nicely confirms that.
Liquidity Demand Zone
But where exactly will be a liquidity zone?
In this case, it will be a zone from the low of the candle to its body.
Example
Above is an example of a liquidity demand zone based on a doji candle on EURGBP forex pair.
Supply & Demand Analysis
Now, imagine the opposite case scenario: the price forms a strong bullish candle.
A formation of such a candle means a buying imbalance and an excess of demand.
Doji candle formation will signify that such an excess of demand was finally absorbed by supply.
The price tested a liquidity pool, and equilibrium was found.
Liquidity Supply Zone
A liquidity zone will be based on the area from the high of the candle to its body.
Example
Below, you can find an example of a liquidity supply zone based on doji candle.
Doji Cluster
There will be situations when doji candles will cluster, forming 2, 3, 4 or even more such candles in a row.
Dojies can also be accompanied by weak, low-momentum candles.
Such a cluster will provide even stronger evidence of a test of a significant liquidity zone.
All such doji's will compose a liquidity zone.
Example
Below is an example of such a doji cluster on GBPAUD forex pair.
Candle 2
The second liquidity candlestick you should know about is a rejection candle.
Candle Structure & Bullish Rejection
This candle has a long wick in comparison to its body.
A lower wick will be called a bullish rejection.
The logic is simple.
First, the price is falling sharply because of the excess of supply.
Then, the market finds a demand cluster and reverses quickly, forming a long lower wick.
The low of this candle will signify a concentration of demand.
Example
Below is an example of the occurrence of a bullish rejection on GBPUSD forex pair.
Candle Structure & Bearish Rejection
A bearish rejection is a formation of a long upper wick.
First, the price rises rapidly, driven by the excess of demand.
Then, the market finds a supply cluster and reverses quickly, forming a long upper wick.
The low of this candle will signify a concentration of supply.
Example
Examine an example of a bearish rejection on GBPUSD.
Rejection Cluster
There will be cases when rejection candles will cluster, forming 2, 3, 4 or even more rejections in a row.
Such a cluster will indicate tests of a significant liquidity zone.
In that situation, a liquidity zone will be based on all the rejection wicks.
Multiple rejections from the downside will compose a demand cluster.
Multiple rejections from the upside will compose a supply cluster.
Examples
Below is the example of a demand zone based on a bullish rejection cluster on GBPJPY.
Check the example of a liquidity supply zone based on a bearish rejection cluster on EURAUD forex pair.
Candle 2
The third liquidity candlestick we will study is a momentum candle.
This candle has a huge body in comparison to average candles.
High Momentum Bullish Candle Structure
A high momentum bullish candle will signify a strong buying imbalance.
It should have a big green body.
The low of this candle will indicate a significant demand cluster.
Example
I found a perfect example of a high momentum bullish candle on NZDUSD forex pair.
High Momentum Bearish Candle Structure
A high momentum bearish candle will signify a strong selling imbalance.
It should have a big red body.
The high of this candle will indicate a significant supply cluster.
Example
Below is an example of such a liquidity candle on GBPCAD.
Candle 4
And the final liquidity candlestick pattern that you must know is a cluster of low momentum and average candles.
Analysing different markets, very often you will see clusters of even 10 low momentum candles.
While newbie traders usually ignore such formations, they are very important.
Candlestick Pattern Meaning
Such sideways weak price action will signify a silent institutional accumulation of trading volumes.
Such accumulations require market liquidity, so they will always occur on liquidity clusters.
The entire range of such an accumulation will represent a significant liquidity zone.
Example
Below is an example of such a liquidity cluster on EURCAD forex pair.
The Takeaway
These 4 different candlestick patterns will help you to accurately find liquidity on any market.
The understanding of the psychology of these patterns will help you to identify liquidity zones quickly and trade them, making good profits.
