This lesson introduces the concepts of internal and external range liquidity, which helps in understanding the narrative of price movement from one liquidity pool to another.
Defining the Trading Range
First, we must define a trading range. In SMC, a trading range is typically established by a significant swing high and a significant swing low that are part of the major, external market structure.
- External Range Liquidity: This refers to the liquidity resting outside the current trading range. Specifically, it is the buy-side liquidity above the range's swing high and the sell-side liquidity below the range's swing low.
- Internal Range Liquidity: This refers to the liquidity existing inside the current trading range. These are the minor swing highs and lows, Fair Value Gaps (FVGs), and other inefficiencies that are created as price travels from one end of the range to the other.
The Narrative of Price Movement
The market tends to move in a predictable narrative: it sweeps external liquidity and then seeks internal liquidity, or vice versa.
- Sweep of External Liquidity: Price will move to take out the liquidity resting above a major high or below a major low. This is the "liquidity grab" on the external structure.
- Move to Internal Liquidity: After sweeping the external liquidity, price will often reverse and travel back inside the range. Its target is now the internal range liquidity. This could be filling an FVG, mitigating an Order Block, or sweeping minor internal swing points.
- Sweep of Opposite External Liquidity: Once the objectives within the internal range are met, the market's next logical target becomes the external range liquidity on the opposite side of the range.
Example Flow:
- Price sweeps the sell-side liquidity below a major swing low (External Liquidity).
- It reverses and rallies, filling an FVG (Internal Liquidity) that was created on the way down.
- After filling the FVG, the rally continues, now targeting the buy-side liquidity resting above the major swing high (the other side of the External Liquidity).
Trading with this Concept
By understanding this flow, traders can better frame their trade ideas:
- After you see a sweep of a major external high or low, you can anticipate a reversal and look for entries that target internal range liquidity.
- Once price has taken out a key internal liquidity point (like filling a significant FVG), you can look for setups that target the opposing external liquidity.
- This concept helps you define a clear "story" or "narrative" for your trade, providing logical targets for your positions.
Conclusion
Thinking in terms of internal and external range liquidity provides a powerful framework for understanding market flow. It helps to answer the question, "Where is price now, and where is it likely to go next?" Price is always seeking liquidity, and by differentiating between the liquidity inside and outside the current range, you can build a clearer picture of the market's intentions.
In the next module, we will take a deeper dive into Advanced Market Structure.