EUR/USD: How To Trade Off Liquidity Post A Structure Breakout

If you are a discretionary trader, this chart illustration will hopefully enhance your understanding of what to consider key areas in a chart where opportunities may arise. They go by the name "liquidity areas/levels".

Understanding the levels where you want to engage in buy/sell action is absolutely critical. After all, the ABCs of technical analysis orbits around finding these key levels.

One of the typical pitfalls aspiring traders fall victims of is the failure to select the right price location with the prospects of enough risk-reward, and most importantly, do it in a consistent manner.

Let’s look into a simple yet very effective strategy based on trading off liquidity levels for a 2:1 risk reward with a stop half the size of the previous swing low/high that led to the break of the structure.

But first, what are liquidity Levels?

These are levels where decisions will be made as they serve as a historical reference. Similarly, these areas will always attract interest as that’s where pockets of liquidity via the placement of stop loss orders reside, hence why in the institutional world levels of support and resistance are often referred as liquidity levels. The formation of a swing high or a swing low in the chart comes as a result of an imbalance of supply/demand.

As a rule of thumb, unless the rejection makes it to a 50% retracement of the previous high/low, be in high alert of a low quality liquidity level; the more vigorous the rejection of a level, the more chances it has of holding on a retest, especially if the rejection has led to a new cycle high or low. Other factors such as confluence, market conditions (risk on/off), market structure, economic data, will play a role in determining if the area will hold or fold.

Other nuances one must be aware of when trading levels of liquidity include factoring in the time. If the separation between the creation of the liquidity area and the first retest comes after an excessive number of days/weeks, the level may not hold the same weight as it used to as the market context evolves and orders pulled. At the same time, if you find two or more liquidity levels nearby, market participants will tend to place their stop loss orders at the most extreme level amid the clustering of multiple levels of interest.

To properly illustrate a level of liquidity where an opportunity to buy or sell may be present, simply draw a horizontal line from the latest wick or swing high/low.

In this EURUSD hourly chart, I randomly selected over a month of trading the EURUSD, with a blue line drawn if the liquidity level led to a break of the market structure (via higher highs or lower lows) or a red line if the retest of the liquidity level occurs amid a failure of a break in market structure. By the end of the exercise, it should be abundantly clear how engaging in buy/sell trades prior to a break of the market structure carries much greater chances of success.