Recently, I've seen quite a few people asking about liquidity, so I might as well organize my understanding and share it with everyone.

When it comes to liquidity, many people may have heard of it but haven't truly understood what it is. Simply put, it refers to the total of all pending orders at a certain price level in the market. Every high and low point hides liquidity, and smart funds rely on this liquidity to fill market gaps and make profits.

Liquidity can be divided into several categories. I'll start with the two most common ones. Buyer liquidity refers to where those wanting to sell assets will set their stop-loss orders, usually near the previous day's high, last week's high, or at similar high points. These levels are what we call resistance levels, bearing significant selling pressure. Conversely, seller liquidity is where buyers set their stop-loss orders, generally below support levels. When the price breaks through these key points, it triggers stop-loss sell orders.

Another important classification is external liquidity and internal liquidity. External liquidity is the highest and lowest points of the entire consolidation range, while internal liquidity consists of various support and resistance levels within that range. Essentially, the market moves constantly between these two.

So, what is a liquidity pool? Simply put, it's a concentration of large pending orders within a certain price range. Limit orders provide liquidity, allowing market takers to execute trades quickly.

This leads to an interesting phenomenon called liquidity hunting. Smart money (mainly institutional investors) will target the stop-loss points set by retail traders, which are actually concentrated liquidity zones. Suppose a certain level is widely regarded as support by retail traders, with many setting stop-loss orders there. Smart money might manipulate the price or information to trigger these stops, rapidly creating a surge of liquidity and causing sharp volatility. Then, they absorb these sell orders at lower levels, repeatedly manipulate the price with favorable news, and push the price higher to realize profits.

In essence, market trading often revolves around traders' psychology. So, before actually making a move, it's helpful to see whether the current market target is more profitable for the bulls or the bears, because smart money tends to target the side that's making the most profit. Of course, this process isn't as simple as it sounds; it may involve a series of oscillations and reversals.

Market fluctuations are based on liquidity, and capital flows among different groups based on volatility. Understanding this can be very helpful for analyzing the market.