Skip to main content

Internal and External Liquidity in ICT

Internal and External Liquidity in ICT | Smart Money Concepts (SMC) Trading Introduction In the world of ICT (Inner Circle Trader) and Smart Money Concepts (SMC) trading , understanding liquidity is critical for anticipating market moves and aligning with institutional players. Two key types of liquidity every trader should understand are internal and external liquidity . This guide breaks down the difference between internal and external liquidity in ICT trading, why they matter, and how to use them to your advantage in your strategy. What Is Liquidity in ICT Trading? In ICT and SMC terminology, liquidity refers to areas in the market where orders are clustered — primarily stop-loss orders and pending buy/sell orders. These zones are attractive to smart money (institutions, banks, hedge funds) because they offer high-volume areas to execute large positions with minimal slippage. Liquidity is often hidden behind price action structures, and understanding where it's ...
Post a Comment

Internal and External Liquidity in ICT

Internal and External Liquidity in ICT | Smart Money Concepts (SMC) Trading


Introduction

In the world of ICT (Inner Circle Trader) and Smart Money Concepts (SMC) trading, understanding liquidity is critical for anticipating market moves and aligning with institutional players. Two key types of liquidity every trader should understand are internal and external liquidity.

This guide breaks down the difference between internal and external liquidity in ICT trading, why they matter, and how to use them to your advantage in your strategy.

What Is Liquidity in ICT Trading?

In ICT and SMC terminology, liquidity refers to areas in the market where orders are clustered — primarily stop-loss orders and pending buy/sell orders. These zones are attractive to smart money (institutions, banks, hedge funds) because they offer high-volume areas to execute large positions with minimal slippage.

Liquidity is often hidden behind price action structures, and understanding where it's sitting is crucial for identifying smart money intentions.

Internal vs External Liquidity: Key Differences

🔹 Internal Liquidity

Internal liquidity exists within a trading range or consolidation — it's the liquidity formed inside the structure.

Characteristics:

  • Found between swing highs and lows

  • Occurs within range-bound markets or accumulation/distribution zones

  • Forms as equal highs/lows, or through internal pullbacks (minor S/R)

  • Often a setup for fake moves or internal grabs before external targets

Example:

Imagine price ranging between 1.1000 and 1.1050. Stops that sit above internal highs (like 1.1030) are internal liquidity. Smart money may trigger these to trap breakout traders before reversing.

🔹 External Liquidity

External liquidity lies outside the established range — beyond the swing high or low. These are the true targets of institutional moves.

Characteristics:

  • Found above swing highs or below swing lows

  • Often aligned with buy-side (BSL) or sell-side liquidity (SSL)

  • Smart money hunts these levels to fill large orders

  • Typically leads to real breakouts or market structure shifts

Example:

If a trading range ends at 1.1050, the stops resting at 1.1060+ are considered external liquidity. This is where smart money drives price to capture stops and induce liquidity before reversing or continuing trend.

Why Does Liquidity Matter in ICT / SMC?

Understanding internal and external liquidity helps you:

  • Avoid retail traps (e.g. false breakouts)

  • Anticipate stop hunts and liquidity grabs

  • Trade in alignment with institutional intent

  • Refine entry and exit points based on liquidity zones

  • Increase RR (risk-to-reward) by targeting liquidity voids

How To Use Internal and External Liquidity in Your Trading

✅ 1. Identify the Range

Start by identifying the recent swing high and low. This gives you the framework to distinguish internal vs external zones.

✅ 2. Map Out Equal Highs/Lows

Equal highs or lows are magnets for liquidity. Internally, they can be used for manipulation; externally, they serve as targets.

✅ 3. Watch for Liquidity Sweeps

Look for a liquidity grab (also called a stop hunt) — where price violates a key level briefly before reversing. This usually signals smart money has entered.

✅ 4. Align With Market Structure

Use market structure shifts (MSS) to confirm that the liquidity grab was valid and not a genuine breakout.

Example Chart Setup (Text-Based)

             External Liquidity
                     ▲
              ┌──────┐
              │ 1.1060 │ ← Buy stops
              └──────┘
                     ▲
                     │
        ┌───────┐         Internal Liquidity
        │ 1.1030 │ ← Equal highs
        └───────┘         (Fakeout level)
                     │
       ┌──────────────┐
       │  Consolidation │
       └──────────────┘
                     │
              ┌──────┐
              │ 1.1000 │ ← Swing Low
              └──────┘
                     ▼
             External Liquidity

Final Thoughts

In ICT and Smart Money trading, internal and external liquidity act as roadmaps for where the market is likely to go next. By understanding how smart money targets liquidity, traders can avoid being manipulated and instead, ride with the wave.

If you're serious about mastering ICT concepts, begin every analysis with liquidity — it's where every big move starts and ends.

FAQs

❓ What is the difference between buy-side and sell-side liquidity?

  • Buy-side liquidity = stops above highs (used in short positions)

  • Sell-side liquidity = stops below lows (used in long positions)

❓ Is internal liquidity a trade entry signal?

Not directly — but it's often a precursor to a move toward external liquidity, which can be an entry signal when confirmed with structure shifts.

❓ How do smart money traders use liquidity?

They engineer price moves to grab liquidity (stops) and enter large positions where retail traders are weakest.

Related Terms to Explore

  • Liquidity Void

  • Fair Value Gap (FVG)

  • Order Blocks (OB)

  • Breaker Blocks

  • Market Structure Shift (MSS)


Labels:

Comments

Post a Comment

Popular posts from this blog

Inverse FVG in Smart Money Concept

Inverse FVG in Smart Money Concept: Understanding the Hidden Liquidity Trap Introduction In the world of Smart Money Concepts (SMC) , understanding how institutional traders move the markets is key to gaining a true edge. One of the most critical concepts within SMC is the Fair Value Gap (FVG) —a price imbalance created during impulsive moves. But there's a lesser-known variation that’s catching the attention of traders: the Inverse FVG . This article breaks down what an Inverse Fair Value Gap is, how it fits into Smart Money Concepts, and how you can use it to refine your entries and improve win rates. What Is a Fair Value Gap (FVG)? Before diving into the inverse variant, let’s quickly review the Fair Value Gap . An FVG is a price imbalance where a three-candle formation shows a gap between the first and third candle, skipping over the middle one. It represents inefficient price movement , often caused by aggressive buying or selling by institutions (aka "Smart Mon...
Post a Comment
Read more

Reclaimed OB in Smart Money Concept

Reclaimed Order Blocks (OB) in Smart Money Concepts (SMC): A Deep Dive In the world of Smart Money Concepts (SMC) , one of the most intriguing and powerful setups traders focus on is the Reclaimed Order Block (OB) . Understanding this concept can significantly enhance your edge in the market by aligning your trades with institutional activity. This article will explore what a reclaimed OB is, why it's important in the context of smart money trading, and how you can identify and trade it effectively. What Is a Reclaimed Order Block? A Reclaimed Order Block is a previously invalidated or broken Order Block (OB) that later regains its relevance as a point of interest or liquidity. In traditional SMC, an Order Block is the last bullish or bearish candle before a significant move in the opposite direction—essentially where institutions or “smart money” placed large orders. However, markets are dynamic, and sometimes price breaks through these OBs , seemingly invalidating them...
Post a Comment
Read more

New Week Opening Gap in Smart Money Concept

New Week Opening Gap in Smart Money Concept: A Key Strategy for Traders Introduction In the world of trading, investors and traders constantly seek strategies that give them an edge in predicting market movements. One such strategy that has gained attention recently is the New Week Opening Gap in the context of the Smart Money Concept (SMC) . By understanding this concept, traders can improve their chances of making profitable decisions. In this article, we’ll explore the New Week Opening Gap, its significance within the Smart Money Concept, and how you can use it as a reliable trading strategy. What is the Smart Money Concept (SMC)? The Smart Money Concept (SMC) refers to the analysis of market behavior that reflects the actions of institutional investors, hedge funds, and other large financial entities. These investors are typically more informed and have better resources compared to retail traders. The concept is based on the idea that "smart money" moves in a predi...
Post a Comment
Read more