Lets understand the price movement of Nifty Future charts on 21st Sep 2016 and lets try to understand how the liquidity hunt happened. Nifty Futures opened within previous days range and started moving up unidirectional in the first 90min which also broken 2 day high followed by sideways action till 12:45p.m. The sideways action is followed by a sharp selloff in the noon session triggering huge volume at the bottom.
Our motive is here to study who are the buyers/sellers who appeared all in a sudden?
If you notice 1min charts of nifty futures the volume triggered around 2:18p.m is around 6,67,725 which is almost 10-15 times normal than the usual volumes. Who is transacting all in a sudden. We know that, any transaction at any given price involves both buying and selling parties. So who is exactly willing to buy and sell with that huge volume exactly at that price?
As i explained in liquidity hunt article most of the traders have habbit of placing stops at day high, day low, weak high, weak low, significant high or low and even at round figures below 8800 as expained in stop hunting. In this case traders would have placed their stops below 8800 zone or even below the prev significant low zone 8786.1. Also traders who want to short this market would placed their limit orders below 8800 or significant low zone 8786.1.
Smart traders who wants more liquidity would love to trigger this zone and thereby swallowing all the liquidity triggering huge volume on the charts. Liqudity hunt is very much visual from Orderflow as well where sellers get trapped at the extreme bottom as shown in the above orderflow charts.
— Marketcalls (@marketcalls_) September 21, 2016
Moral of the story : Knowing what is happening in the market provides more edge rather than trading blindly with support resistance zones or simply placing stops around high/lows and ends getting trapped.