Recently, I’ve been pondering a question: why do some traders always manage to accurately buy the dip, while most people are always caught in a trap? The answer might actually lie in liquidity.

Let’s first understand what liquidity is. Simply put, it’s the total of all orders present at specific price points in the market. The highs and lows on a candlestick chart actually hide liquidity. Smart money profits by consuming this liquidity.

Liquidity can be roughly divided into a few categories. First is buy-side liquidity, which refers to stop-loss orders set by sellers. These stop-losses are usually placed at previous day’s highs, last week’s highs, or similar high points. That’s why resistance levels are so hard to break through—they’re stacked with a lot of selling pressure.

Conversely, there is sell-side liquidity, where buyers’ stop-loss orders are often placed below support levels. When the price breaks below support, these stop-losses get triggered, generating a large volume of sell orders.

There’s also a broader framework: the difference between external liquidity and internal liquidity. External liquidity is the highest and lowest points of a consolidation zone, while internal liquidity refers to the pressure and support within that zone. Essentially, the market is constantly moving between these two.

At this point, you might ask: what is a liquidity pool? It’s basically a concentration of a large number of unfilled orders within a certain price range. Limit orders provide liquidity, while market orders execute quickly.

This brings us to a common phenomenon—liquidity hunting. Institutional investors (smart money) target retail traders’ stop-loss points because that’s where liquidity is most concentrated. Suppose a certain level is perceived as support; retail traders will set many stop-losses there. Smart money manipulates the price or information to trigger these stop-losses, instantly generating a large amount of liquidity and causing intense volatility. Then they absorb these sell orders at low levels, and with positive news, push the price higher—repeating the cycle.

In essence, sometimes market trading is about human psychology. So before placing an order, it’s helpful to see whether the market is currently favoring the bulls or the bears, because smart money often targets the party making the most profit. Of course, this process isn’t so straightforward; it involves various oscillations along the way.

Markets fluctuate because of liquidity, and money flows among different groups due to these fluctuations. That’s the essence of the market. The above is just personal observation and analysis, for learning and discussion only, and does not constitute any investment advice.