Liquidity Pools – SMC and ICT Trading Concept

Liquidity is the most powerful concept in smart money trading. Inner Circle Trading concepts primarily focus on understanding on finding and analyzing institutional footprints, and how large market participants operate in financial market. Their involvement in financial markets results in high volatility and liquidity. ICT Liquidity pools generally give us areas for bullish and bearish trade setups.

This article explores understanding of liquidity pools, its identification, and its use for bullish and bearish trade setups.

Understanding Liquidity and Liquidity Pools

This concept is widely used by SMC and ICT traders. It would not be incorrect to say that SMC and ICT trading concepts are centered around the concept of liquidity. That is why it is crucial to understand and grasp the concept of liquidity. Liquidity refers to the presence of buyer and sellers in the market. These are the market participants who are ready to execute transaction at the current market price.

Retail traders typically buy or sell at the current market price. Institutional and smart money traders operate differently in the market. Smart money traders aim to buy below the market price and sell below the market price to maximize profits.

Retail traders often use predictable and easily identifiable price patterns. Institutions have the data to exploit these patterns for their benefit. Like many retail traders enter trades after price breaks above an old high or below an old low. Their stop-loss would be below a previous swing low or just above a swing high. These stop-loss orders also contribute to liquidity pools because when price reaches to the areas, these orders become market buy and sell orders.

For smart money and institutions, old highs are often used to accumulate buy-side liquidity in the form buy stop orders and orders of traders waiting to buy after a breakout. For smart money and institutions, old lows are often used to accumulate sell-side liquidity in the form sell stop orders and orders of traders waiting to sell after a breakout.

Understanding the variables allows traders to anticipate the levels where liquidity pools might form. Price after taking liquidity from these level helps market align with institutional order flow. This helps traders finding bullish and bearish market scenarios. Trades setups aligned with liquidity sweep are considered as high-probability trade setups in SMC and ICT trading.

Identification of Liquidity Pools

In SMC and ICT trading, it is crucial to identify levels of liquidity pools. These pools reveal the areas where institutions is likely to engage in trading activity. This is because institutions use their privilege data. They move the market to these areas in order to grab orders in the form of Stop-losses, take-profits, and breakout orders.

Swing highs and swing lows are the prominent points within a price impulse. Stop-lose orders for long trades are placed just below swing lows. Stop-loss orders for short trades are placed above swing highs. Institutions target these areas because these areas provide liquidity for further price movement. That is why it is crucial for SMC and ICT traders to mark recent swing highs and swing lows.

Ranging market is the most common pattern for marking liquidity pools. The longer the market moves inside a range, the more liquidity reside above and below the range. In Wyckoff trading method, these ranges are accumulation and distribution areas.  Both buyers and sellers are active and liquidity is building above and below the range. This kind of liquidity is referred to as liquidity pools.

Equal highs and lows are areas where institutions are interested and price reaches to these areas. Price often engineers liquidity by creating equal highs and lows. ICT traders use order blocks above swing highs as a reference point to anticipate areas where liquidity is concentrated. Traders also use order blocks below equal swing lows as a reference point to anticipate areas where liquidity is concentrated.

Psychological levels attract price for liquidity. Round number in financial asset naturally attract retail traders’ attention. They place their trades and the level becomes liquidity pool for institutions. ICT and SMC traders monitor these levels for potential liquidity sweeps and reversals.

Liquidity pools for Bullish Trading

In a bullish market, liquidity pools are areas on chart where smart money traders seek opportunities to buy. These areas align with the concept of buy-side dominance. In bullish institutional order flow, overall market structure favors higher prices. Understanding bullish liquidity pools involves identifying key levels where sell-side liquidity can be cleared. This gives us ideal buying opportunities if we are aligned with other ICT and SMC concepts.

Sell-side liquidity rests below old lows or equal lows. Retail traders often place their stop-loss orders just below these lows. They expect price to stay above these lows. There is possibility that breakout traders place their orders below old lows. They anticipate downward movement. This clustering of sell orders creates a pool of liquidity that smart money targets.

In a Bullish market, price often sweeps liquidity below these lows. When this happens price often dips into a discount zone. For bullish trades, discount level is the favorable area for institutions and smart money traders.

After clearing the sell-side liquidity, market often reverses and resumes its uptrend. Logic behind the market scenario is that smart money has now accumulated their long positions. This type of scenario gives ICT and SMC trader high-probability buy trade setups.

For Bullish trade setup, it is advised to shift in lower timeframe and find Market Structure Shift. Mark the important zones like FVG, Breaker Block and Order Block for perfect trade entries. Your stop-loss should be placed the newly created swing low. Your SL should be between 40-50 pips below the low. Any deeper movement may invalidate the setup and signal a change in the overall trend.

As far as take-profit target is concerned, we should focus on buy-side liquidity resting above the old highs or equal highs. These old highs attract buy stop orders from retail traders who are shorting the market.

By trading with Bullish Liquidity pools, SMC and ICT Traders align with institutional order flow. This gives them an edge over retail traders.

Liquidity pools for Bearish Trading

In a bearish market, liquidity pools are areas on chart where smart money traders seek opportunities to sell. These areas align with the concept of sell-side dominance. In bearish institutional order flow, overall market structure favors lower prices. Understanding bearish liquidity pools involves identifying key levels where buy-side liquidity can be cleared. This gives us ideal selling opportunities if we are aligned with other ICT and SMC concepts.

Buy-side liquidity rests above old highs or equal highs. Retail traders often place their stop-loss orders just above these highs. They expect price to stay below these highs. There is possibility that breakout traders place their orders above old highs. They anticipate upward movement. This clustering of buy orders creates a pool of liquidity that smart money targets.

In a Bearish market, price often sweeps liquidity above these highs. When this happens price often reaches into a premium zone. For sell trades, premium level is the favorable area for institutions and smart money traders.

After clearing the buy-side liquidity, market often reverses and resumes its downtrend. Logic behind the market scenario is that smart money has now accumulated their short positions. This type of scenario gives ICT and SMC trader high-probability sell trade setups.

For Bearish trade setup, it is advised to shift in lower timeframe and find Market Structure Shift. Mark the important zones like FVG, Breaker Block and Order Block for perfect trade entries. Your stop-loss should be placed above the newly created swing high. Your SL should be between 40-50 pips above the low. Any uptrend movement may invalidate the setup and signal a change in the overall trend.

As far as take-profit target is concerned, we should focus on sell-side liquidity resting below the old lows or equal lows. These old lows attract sell stop orders from retail traders who are long in the market.

By trading with Bearish Liquidity pools, SMC and ICT Traders align with institutional order flow. This gives them an edge over retail traders.

Final Note

Trading with liquidity pools requires in-depth understanding of price action and market structure. This concept is not used alone. Other ICT and SMC concepts are used for better entries and exits.  Along with the significant opportunities that this approach carries, it involves risks that should not be overlooked. Past price action can help in understanding price behavior but does not guarantee success in trading.

This content is for educational purpose and not a trading advice. Use proper risk management strategies and techniques. Do not trade with the capital that you cannot afford to lose. Seek professional advice before trading or investing in the market.

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