Identifying a system that repeatedly yields profitable trades is often a challenge. Most traders have difficulty creating systems that result in high-risk, high-reward situations. But it is possible to use both market structure and liquidity to optimize the profit potential in every trade.
In this article, we’ll discuss how using a combination of market structure and liquidity, along with a unique approach to candle patterns, can drastically improve your trading results. By mastering the relationship between these factors, you’ll gain the tools necessary to enter the market at the right time and with a higher probability of success.
If you’re prepared to revolutionize your trading strategy, this manual will show you precisely how to employ major technical analysis principles to formulate a profitable method. Let’s get started with how emphasizing these two pivotal principles—market structure and liquidity—will prepare you for success, and guarantee you reap massive returns at minimal risk.
How to Use Trading Indicator Combos (Step-by-Step)
Step 1: Market Structure
Knowing market structure is the first step to using this strategy. No matter if you’re trading gold, crypto, or stocks, all charts will have the same pattern of market structure. Markets will go through:
- Uptrends: in which the price goes up
- Downtrends: in which the price goes down
- Consolidation: in which the price goes sideways
This is significant since we should only take long trades in uptrends and short trades in downtrends. Consolidation markets, which usually imply the absence of direction, are best not taken.
It is difficult to differentiate between uptrends, downtrends, and consolidation in real-time trading. The important indicators are, however,
- Higher highs and higher lows during an uptrend
- Lower highs and lower lows during a downtrend
After price breaks a prior high or low, it indicates a break of structure, representing a continuation of trend. Here, the majority of traders act.
Tip:
To simplify this process, look for higher lows in an uptrend. When price breaks below such levels, it indicates a possible transition to a downtrend.
Step 2: Liquidity
The second important component in your plan is liquidity. It means the orders on the market—buy orders and sell orders—behind which the market has its motion. Knowledge about liquidity is critical as it signals where price is most likely to move next.
When traders place their orders, they also set stop-loss levels. If you’re buying below a previous low, you’re likely setting your stop-loss beneath that low. Likewise, if you’re shorting from above a previous high, your stop-loss will be set above that level. This creates pockets of resting liquidity.
Here’s the key point: the market will frequently move to these points of liquidity, causing stop-losses and creating price movements in the reverse direction. In other words, price tends to move towards areas of high liquidity, before reversing direction.
Liquidity in Consolidation
In consolidation markets, seek equal highs and equal lows since they tend to create large reservoirs of liquidity naturally. The market tends to break these levels to hit the resting stop-loss orders before it reverses.
Merging Market Structure and Liquidity
When you grasp market structure and liquidity, you can begin merging the two concepts in order to determine the best points of entry. Here’s how:
Uptrend Setup:
- Seek a chart with higher highs and higher lows.
- Find equal lows within trend, where there will be liquidity.
- Wait for price to fall below these equal lows, invoking liquidity.
- When liquidity is consumed, wait for a breach of structure, which indicates completion of the retracement and continuation of the trend.
- Enter the trade with stop loss just below recent low and place your take profit at the high of initial move.
Downtrend Setup
- In a downtrend, look for lower highs and lower lows.
- Look for equal highs to provide liquidity.
- Wait for price to break these equal highs to initiate liquidity.
- Once liquidity is achieved, a break of structure should follow, indicating a return in the opposite direction.
- Enter the short trade, with your stop loss above the supply zone and take profit at the low of the initial move.
Real-Life Example:
Let’s go through a straightforward example employing the strategy outlined:
Uptrend Scenario:
Should the chart print higher highs and higher lows, and price form equal lows at the lowermost part of the trend, waiting for price to break these lows is the next step. Subsequent to the break, a possible reversal awaits. Now’s the time to enter the trade after price validates the uptrend direction again. With a firm risk-to-reward ratio in place, set your stop-loss below the demand zone and take-profit at the move high.
Final Thoughts:
Knowing the structure of markets and liquidity is key to understanding technical analysis and improving your trading performance. Applying these principles to determine entry and liquidity areas enables you to execute more profitable trades with much reduced risk.
How to Trade with Trading Indicator Combos (Leading & Lagging) is all about precision timing when it comes to entering and exiting trades. Pair this strategy with your current knowledge of leading and lagging indicators in order to streamline your approach and take your trading to the next level.