Liquidity Pools

Look at the above picture. You might have seen this pattern many times.

Market is in a bull trend. It pull backs and makes a low at point A. Afterwards it goes up and later returns to the same price level and print a beautiful pin bar.

As a trader what will be your action in this area?

Some possibilities are

1.You will keep a stop loss order just below point A if you are holding long position

2.You will sell just below point A expecting a breakout to the down side

3.You will go long above the pin bar with a stop loss below the candle

Will you buy at the circled area?  Who bought there? Who absorbed both stop loss selling and breakout selling?  Why?

This is a copy paste of an earlier post titled Food for Thought. I had posted the same question in two major discussion forums namely Traderji and Indi Traders. Go through these threads.At least you can have an idea about the quality of content in these forums.

Now coming back to the subject.I have read tons of materials on trading. So far I have not seen any authors, bloggers or traders recommending to buy at the circled  area.Then who bought here ?

The answer is Big Money not Smart Money.Big Money is not always Smart Money. On many occasions Big Money will end up as Dumb Money. There are specific reasons for BM to place their orders here.

BM trade big and they can  be institutions, big funds or High net worth traders Generally they are higher time frame traders and do not bother about ten or fifteen point moves like retail traders.They never chase price . They will place their limit orders and let the market come to them and fill their orders quietly at the right price.

Now think about the above situation. Everybody knows a lot of sell orders exists below the previous support. There exists a "Liquidity Pool" .Where else can BM hide their buy orders ? Most of the retailers will end up providing liquidity to BM.

Market is a living organism. First priority of the Market is to ensure its own survival. Once the orders dry up it will move towards a "Liquidity Pool" where a lot of orders exist.Market will shake out many traders and will create order flow on its own.

Always pay attention to "Liquidity Pools". You will get a lot of trading opportunities around these areas.