Recently, while watching the market, I was thinking about a question—why does the market sometimes experience intense volatility at certain points? I later realized that it’s actually liquidity playing tricks behind the scenes.

Let’s start with the most basic concept. In the crypto market, liquidity simply refers to the total amount of all orders at a specific price. Every high point and low point hides liquidity, and smart money exploits these liquidity pools to fill market gaps and profit from them.

Liquidity can be divided into several types. Buyer liquidity (BSL) usually appears above resistance levels—that is, at previous day’s highs, last week’s highs, or similar high points. Retail traders tend to place stop-loss orders there, resulting in these levels bearing significant selling pressure. Conversely, seller liquidity (SSL) is hidden below support levels; when the price breaks below support, those stop-loss orders are triggered, generating large amounts of liquidity.

There’s also a more important concept—external liquidity and internal liquidity. The market essentially swings between these two. External liquidity is at the highest and lowest points of consolidation zones, while internal liquidity refers to the pressure and support within the range. Once you understand this, you can see what the market is doing.

At this point, I have to mention liquidity pools. Simply put, they are large accumulations of unfilled orders within a certain price range. Order placement provides liquidity, allowing takers to execute trades quickly. But there’s also risk—smart money often targets retail traders’ stop-loss points.

I’ve seen this happen too many times: a certain level is widely regarded as support, so retail traders place many stop-loss orders there. Then, smart money manipulates the price to break through, triggering those stop-losses, creating massive liquidity, and causing a sharp drop in price. After retail traders are forced to cut losses, they buy back at the low, and with positive news, push the price back up. Throughout this process, liquidity becomes their prey.

Honestly, market trading is sometimes just about human psychology. So before placing an order, I first check whether the bulls or bears are currently profiting, because smart money usually targets the party making the most profit. Of course, this process isn’t simple; it involves various oscillations and tests.

Ultimately, the market fluctuates based on liquidity—money flows from one group of people to another through these waves. Once you understand the essence of liquidity, you can see the true face of the market.