How to Read the Market Through Liquidity

Liquidity is one of the most important yet misunderstood concepts in trading. Many traders hear the term daily, but only a small percentage truly understand what liquidity represents, where it comes from, and how to use it to improve entries, confirmations and targets.

To make things clearer, this article breaks liquidity down in a straightforward, beginner-friendly way while still offering insights that more advanced traders can apply immediately.

What liquidity really means

Liquidity refers to how easily an instrument can be bought or sold at a stable price. Based on this, markets generally fall into two broad categories:

• Highly liquid markets
Major foreign exchange pairs, global indices and large capitalisation stocks fall into this group. These instruments allow traders to place orders with minimal slippage.

• Low liquidity markets
Some smaller or emerging cryptocurrencies fit here. These instruments often move faster, create wider spreads and produce sharper spikes.

Liquidity, however, is more than just execution speed. For traders, it also indicates where buy and sell orders are resting in the market. These orders sit passively until they are triggered. When price reaches an area filled with resting orders, the market reacts. It may reject the level, pause, or push through it entirely.

Understanding where these orders sit helps traders read price behaviour more accurately and gives them a clearer sense of market direction.

The myth: liquidity always sits above swing highs and below swing lows

A common belief, especially among newer traders, is that liquidity exists only above swing highs and below swing lows. Many assume these two areas hold the majority of stop-loss and take-profit orders.

There is some truth here because obvious technical levels tend to attract orders. Even so, this is only part of the picture. Liquidity does not sit only at highs and lows. Resting orders can exist anywhere traders or institutions choose to participate. Since every participant places limit orders differently, liquidity often forms in a much wider range of areas than most expect.

Where liquidity actually forms in the market

Liquidity builds wherever significant orders accumulate. The most common areas include:

• Market structure turning points
Zones where previous buying or selling occurred attract new interest.

• Consolidation boundaries
Range highs and lows often contain large clusters of orders.

• Imbalance zones (inefficiencies)
Gaps or fast moves usually leave untested areas where orders remain.

• High-volume nodes
Price levels that historically traded heavy volume tend to accumulate new liquidity.

• Round numbers and psychological levels
A natural magnet for limit orders from both retail and institutional flows.

Recognising these locations gives traders a clearer map of where liquidity is likely to appear and helps them anticipate market behaviour with greater precision.

What tools help you see real liquidity

To see real liquidity, traders need to look beyond standard candles. Several tools reveal how orders are positioned and executed in the background.

• Depth of Market (DOM)
Displays resting limit orders at each price level and reveals visible liquidity.

• Time and Sales (the Tape)
Reveal where market orders interact with limit orders and highlight absorption or aggressive interest.

• Footprint Charts
Show where market orders hit limit orders and whether the market is absorbing or sweeping liquidity.

Key Takeaways

• Liquidity shows where real buy and sell orders are waiting, not just how fast a trade can be executed.

• It is not limited to swing highs and lows. Resting orders can form anywhere participants choose to transact.

• Common liquidity areas include turning points, consolidations, imbalances, high volume levels and psychological zones.

• Tools such as DOM, the Tape and Footprint Charts reveal how orders sit and how they interact beneath the candles.

• Understanding liquidity helps refine entries, confirmations and targets because traders begin reacting to real order flow instead of guessing patterns.