Welcome to Trading PDF! Today, we’ll explore the concepts of Internal Range Liquidity (IRL) and External Range Liquidity (ERL) in trading. Whether you’re just starting out or have years of experience, grasping these ideas can help you align your trades with market movements and potentially boost your gains.
Why Does Price Move in the Market?
In trading, prices move mainly for two reasons:
- To Capture Liquidity: The market seeks out areas where many orders are placed, such as above previous highs or below previous lows.
- To Balance Price Imbalances: The market fills in gaps where the price moved too quickly, leaving untraded areas known as Fair Value Gaps.
What Is a Dealing Range?
A dealing range is the price area between a significant Swing High and a significant Swing Low on the chart. A Swing High is a peak where the price stops rising and starts falling, while a Swing Low is a valley where the price stops falling and starts rising. These points often take out previous highs or lows, capturing liquidity.
Internal Range Liquidity (IRL) Explained
The Internal Range is everything inside the dealing range between the Swing High and Swing Low. Internal Range Liquidity refers to the liquidity found within this area, usually in the form of Fair Value Gaps.
A Fair Value Gap is a space on the chart where the price moved rapidly, leaving a gap between candles. This gap represents unfilled orders and becomes a target for the market to revisit and fill. Traders often use these gaps as potential entry points because the price is likely to return to these areas to capture liquidity.
Why Are Fair Value Gaps Important?
Fair Value Gaps are crucial because:
- They indicate areas where the price moved too quickly, leaving untraded zones.
- The market tends to return to these gaps to balance out supply and demand.
- They can serve as reliable entry points within the Internal Range.
External Range Liquidity (ERL) Explained
The External Range consists of the Swing High and Swing Low that define the dealing range. External Range Liquidity refers to the liquidity resting outside this range:
- Buy Side Liquidity: Located above the Swing High, where buy stop orders may be placed.
- Sell Side Liquidity: Located below the Swing Low, where sell stop orders may be placed.
These areas are significant because they are common targets for the market to reach, capturing the liquidity from traders’ stop orders.
How Does Price Move to Capture Liquidity?
The price typically moves in cycles:
- From External to Internal: After reaching an External Range Liquidity level, the price moves back into the dealing range to fill Fair Value Gaps (Internal Range Liquidity).
- From Internal to External: Once the Internal Range Liquidity is addressed, the price moves toward the opposite External Range Liquidity to capture more liquidity.
This movement helps the market balance out and provides traders with opportunities to align their trades with these predictable patterns.
Best Time Frames to Spot IRL and ERL
- External Range Liquidity: Use lower time frames like the 15-minute chart to identify significant Swing Highs and Lows.
- Internal Range Liquidity: Use the same or even lower time frames to spot Fair Value Gaps within the dealing range.
By focusing on these time frames, you can more accurately identify liquidity levels and potential trade setups.
Using IRL and ERL to Identify Daily Bias
Understanding where the Internal and External Range Liquidity levels are can help you predict the market’s direction for the day. Here’s how:
- Identify Liquidity Levels: Look for Fair Value Gaps inside the dealing range (IRL) and significant Swing Highs and Lows outside of it (ERL).
- Determine Potential Bias:
- If the price has filled a Fair Value Gap and the next target is an External Range Liquidity level above, the market may be bullish.
- If the price has addressed Internal Range Liquidity and is moving toward External Range Liquidity below, the market may be bearish.
- Observe Price Action After Reaching ERL:
- If the price reaches an ERL level and shows signs of reversal on lower time frames, it might indicate a trend change.
- If the price breaks through the ERL without reversing, the trend may continue, or the market may consolidate before the next move.
Important Note
While IRL and ERL concepts are valuable, they shouldn’t be used in isolation. Always consider other technical indicators and the overall market context to confirm your analysis. Practice identifying these liquidity levels through backtesting or paper trading to build confidence before applying them in live trading.
Frequently Asked Questions (FAQs)
Internal Range Liquidity is found within the dealing range and is often associated with Fair Value Gaps. External Range Liquidity is located outside the dealing range, above significant Swing Highs and below significant Swing Lows, where stop orders are likely placed.
Fair Value Gaps represent areas where the price moved quickly, leaving untraded zones on the chart. These gaps are likely to be filled later as the market seeks to balance itself, making them key areas of liquidity within the dealing range.
By identifying Internal and External Range Liquidity levels, you can anticipate where the price is likely to move next. This helps you align your trades with the market’s natural movements, potentially increasing the accuracy of your entries and exits.
Lower time frames like the 15-minute chart are ideal for spotting External Range Liquidity levels. For Internal Range Liquidity, you can use the same or even lower time frames to identify Fair Value Gaps within the dealing range.
No, while IRL and ERL provide valuable insights, they should be used alongside other technical analysis tools and market indicators. Always consider the broader market context and confirm your findings before making trading decisions.
