Recently, I’ve been studying market structure and found that many people still have some confusion about liquidity. I also spent quite a bit of time clarifying this concept, so today I want to share my understanding.

Simply put, the liquidity of the crypto market is the total of all orders at a specific price. But it’s much more than that, because smart money often relies on a deep understanding of liquidity to fill market gaps and profit.

Liquidity can be divided into several categories. Buyer liquidity mainly appears above resistance levels, which are the points where traders set stop-loss orders for selling assets, usually near the previous day’s high, the previous week’s high, or at similar high points. When the price breaks through these levels, the stop-loss buy orders are triggered, generating liquidity. Conversely, seller liquidity appears below support levels, where traders set stop-loss orders for buying assets. Once the price falls below support, these stop-loss sell orders are executed in large volumes.

There’s also a more macro perspective: the market is constantly moving between external liquidity and internal liquidity. External liquidity is at the highest and lowest points of the consolidation range, while internal liquidity consists of various pressure and support levels within the range. Understanding these helps you see why the market experiences sharp volatility at certain points.

Speaking of liquidity, I have to mention liquidity pools. Simply put, these are large clusters of unfilled orders within specific price ranges. Market makers provide liquidity, allowing traders to execute trades quickly—that’s the role of liquidity pools.

But this also leads to a phenomenon called liquidity hunting. Smart money (mainly institutions) targets the stop-loss points set by retail traders because those are the concentrated points of liquidity. They manipulate prices or information to push the price to these stop-loss levels, triggering a large volume of trades and creating intense short-term volatility. Then, they absorb the sell orders at low levels and, with positive news, push the price higher—completing a cycle of harvesting.

That’s why I often say that sometimes market trading is really about people’s psychology. Before placing an order, it’s helpful to see whether the market is currently making more profit for the bulls or the bears, because smart money usually targets the party with the most profit. Of course, this process isn’t so straightforward; it involves a series of fluctuations, but essentially, it’s like that.

Markets fluctuate based on liquidity, and money flows from one group of people to another during these waves. Once you understand how liquidity works, you can better see what’s happening behind the scenes in the market.