In this article, I will explain what is liquidity run, how to identify it and apply in trading different financial markets.
What is Liquidity Run in Trading
Liquidity run is a specific event when the institutional traders - the smart money exploit the imbalance between supply and demand on the market to initiate or accelerate a significant price movement.
The best way to understand the concept of liquidity run is to study its occurrence around significant liquidity zones.
How to Identify Liquidity Run
Above is a significant liquidity zone - a supply area on EURJPY.
Such area attracts the liquidity and a lot of selling orders concentrate within.
The stop losses of sellers concentrate above that.
The violation of that area makes sellers close their position in a loss - buy it back from the market.
At the same time, buyers start buying the market, assuming that the price will go higher.
Remember that such a violation can easily be the liquidity sweep.
Keep reading and I will explain how to discern it easily.
That creates the imbalance between supply and demand. Demand exceeds supply.
Smart money may take advantage of that situation, amplifying the demand and triggering a rapid bullish continuation.
Such a sharp price movement will be called a liquidity run.
Liquidity run is one of the types of the market manipulation, when the smart money capitalizes on the acceleration of the price movement and drive prices rapidly in a favorable direction.
Take a look at a huge liquidity zone - a demand area on USDCHF.
A lot of buying orders concentrate within.
Stop losses of the buyers lie below that area.
Bearish violation of that area makes buyers close their positions in loss - selling it to the market. At the same time, sellers will start selling, assuming that the price will drop lower.
That creates the imbalance between supply and demand. Supply exceeds demand.
Smart money may take advantage of that situation, amplifying the supply and triggering a rapid bearish continuation.
Such a sharp price movement will be called a liquidity run.
Liquidity Sweep or Liquidity Run
As I said earlier, the violation of the liquidity zone can easily turn into liquidity sweep and a false breakout.
In order to recognize a coming liquidity run, analyze carefully the breakout candle of the liquidity zone.
It should be a strong, high momentum, imbalance candle with a long body and short wicks. That candle should strictly close above the supply zone or close below the demand zone.
The higher the candle closes above the supply zone, the better.
The lower the candle closes below the demand zone, the better.
In the example below, the price violated the liquidity zone with a wick.
With a high probability, such a violation will be a liquidity sweep.
The understanding of the market liquidity, supply and demand is essential for recognition of a coming liquidity run.
The earlier you will spot the coming movement, the more money you will make in trading smart money concept.
