Liquidity I - Draw on Liquidity
Based off of that previous example, our favorable side goes to the buyside, the liquidity near previous highs. Why? Because our structure was bullish, look back at the 1, where we came from. Now try to picture the concept again of water flowing, we are simply picking up liquidity to fuel the move back up
Theory
In the case of the GBPUSD we knocked out liquidity below, to then seek liquidity above.
But this can also happen in the other direction. Where price will run liquidity above the highs before heading lower. Let’s take a look at that.
Remember, above the recent highs price will be deemed to be expensive. It’s a more premium price to sell at. Understand how the “institutions” with market making capabilities will want to take the liquidity above, to cover their long positions they opened in order to run the price higher.
Part of the regime in this case was to aim for the liquidity pool, the local highs, by pushing price higher into the liquidity pool, use that liquidity to cover the long positions and to then short the market at higher prices.
It’s all part of the quantitative approach that hedge funds and other market making capable firms have.