A liquidity state is defined as a behavior of price and order flow over a certain period or piece of price. It is a description of how the market efficiently processes orders by either filling them smoothly-efficient price action-or leaving gaps and unfilled orders-inefficient price action. Liquidity states are foundational to understanding how the market works, as it shows the interaction between buyers, sellers, and the overall flow of orders during price movements.
During the high-liquidity state, price interacts with both sides of the order book, efficiently filling orders as it moves. In this state of the market, spots where orders are fewer-for example, potential inefficiencies-get quickly filled. This balance results in price moving steadily, reflecting a consistent flow of buy and sell orders.
In a high-liquidity state, the market absorbs the continuous orders and very seldom displays gaps. From here, price transitions through the important key levels in maintaining the flow in order. Low-Liquidity State:
A low-liquidity state is when there are fewer orders available to balance the market. In this state, price may leave behind gaps or thinly traded areas as it moves, creating inefficiencies. Order flow in a low-liquidity state is less consistent, leading to behavior where price can jump over certain levels without fully filling the gaps left behind.
This state reflects the market condition wherein price has difficulty finding equilibrium between buyers and sellers. It shows points of less dense order flow, which results in a more dynamic and irregular price action.
Trending liquidity states describe how liquidity interacts with price during directional movements. These states put the focus on how price is flowing through a trend, whether that be in a high or low liquidity state condition.
Price moves directionally but leaves inefficiencies along its movement. This happens when there is less density in the flow of orders in the market and price skips levels when it trends.
Price has been trending with a healthy flow of orders, while any inefficiency that forms on this trend is quickly refilled as the trend takes shape. This reflects a good order flow balance to support direction.
Ranging liquidity states occur when price consolidates within a specific range, highlighting the interaction of liquidity during sideways movement: