Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

How an Institutional Trader Gets Large Pool of Liquidity?

1 min read

fridays-price-action-explained

Lets analyze the Fridays Intraday Price movement of Nifty Futures 1-min chart to understand how exactly Institutional Traders Gets Large Pool of Liquidity? and lets try to understand the context behind that move. On Friday, Nifty futures opened gap up and continued moving unidirectional and lasted for almost 90 minutes. First 90 minutes is a crazy fast upwards drive. Most of the traders (including me) expecting the upside gap (8890 zone) to get closed. Market Sentiment is totally bullish. However 10:45a.m – 1:30p.m is totally a frustrating moment for trend followers as the market is tightly moving in a narrow 25 point range.

And all in a sudden shorter timeframe sellers stepped in and driven the market towards the previous day range thereby closing the gap created in the morning. Move was faster and sharp down move. It also turned the market sentiment from bullish to bearish.

So What could be the motive behind the move?

One of the possible reason is to get fresh liquidity of the sellers aka shake the weaker hand buyers or attract emotional sellers! We call it as liquidity hunt.

What is Liquidity hunt?

Well you need some imagination to understand this topic. Let say you are from ABC institutional desk and you have goals to acquire 10,000,000 shares of Nifty Futures by today at a better net execution price. However market is bullish and there is no enough demand from the sellers as the market sentiment is highly bullish and buyers are dominating and it is practically impossible to get instant liquidity from the sellers.

One way is to acquire slowly and steadily from the market but the problem is you may not get a better effective net price. Alternatively one has to identify where could be the possible maximum sellers liquidity so that big players can drive the market towards the zone (also called as stop hunting) to and get the liquidity.

How by driving the Market Lower you get sellers liquidity?

There are various ways to manipulate liquidity. One of the easiest way is most of the intraday players/positional players have a habit of placing their stop loss at days low, days high, prev day high/low, weekly high/low zones. Possibly the buyers who entered in the market at the market open and the one who entered late seeing the breakout rally would believed that Current Day’s low or Prev Days High or 3 Day high as a potential support zone.

More over many participants those who are watching from outside who wants to enter shorts are the ones who wants markets to break those support zones. So when crowd has a major opinion, it drives pool of crazy liquidity. Shorter timeframe sellers are hitting those zones with smaller volumes, probably their motive is to trigger those large pool of liquidity, make the weaker hands (buyers) to liquidate/sell their positions and also attract the emotional positional sellers (who believe that market will crash from here on) and there by acquiring Nifty Futures at a better possible net effective price.

End of the day Institutional traders would have carry-fwded with their longs, Weaker buyers shaken out and Emotional Positional Sellers carry-fwded with shorts. And the Markets though closed positive would have ended in a negative sentimental note.

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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