Market Logic is Based on Liquidity, Volume, and Inefficiency | orderbloque

There are three main tools for market analysis that you will need once and for all. No more patterns and unnecessary clutter that only hinder and bring failures. The logic of the market is very simple and based on just three main elements: Liquidity, Volume, and Inefficiency. All price action can be described using just these three concepts. 

 

 » The logic of the market is based on liquidity, volume, and inefficiency. «

► Liquidity: At the top of this chain is liquidity, the primary driver of the market. Without liquidity—without buy or sell orders—the market would come to a standstill. It's crucial to understand that while any element on the chart can provide liquidity, the key factor is the quantity: volume.

► Volume: The second most important element is volume—the foundation of all our market logic and strategy. Volume directly reflects the amount of liquidity, or money, that has entered the market.

► Inefficency: The third element is inefficiency, which arises from the influence of volume on price. Inefficiencies are graphical representations of volume at a specific moment in time, varying by time frame, and serve as tools for analyzing the chart.

 

Price always moves from liquidity to inefficiency and vice versa, or from internal liquidity to external liquidity and vice versa. Hence, when looking at any chart, the Points of Interest (POIs) are always price levels or zones where liquidity rests in the form of stop orders, unfilled, and partially filled orders, namely Fair Value Gaps (FVGs), Order Blocks, Rejection Blocks, Support & Resistance at previous highs and lows, or Fractal Points. 

 

All these concepts and terms are briefly defined and outlined below, and explained in detail with context and chart examples in the following video.

How Fair Value Gaps (FVGs), Order Blocks (OB), and Rejection Blocks (RB) operate.

 

Balanced and Unbalanced State of the Market

To understand the deeper logic of inefficiencies and market movements, we need to consider two main factors. The first factor is the state of the market at a certain point in time: balanced or unbalanced. What does this mean? 

 

 

When the market is in a balanced state, the volume of buys and sells is equivalent, and price hardly moves, with neither buyers nor sellers dominating the market. This is very rare and usually occurs on days with very low volatility. The second type is the unbalanced state, which is more typical of any market. This occurs when buy volume exceeds sell volume, causing price to rise, or when sell volume exceeds buy volume, causing price to fall.

 

Efficient and Inefficient Price Delivery

The second factor is the efficiency of price delivery, which also comes in two types. The first type is efficient delivery, where, in the context of a certain market movement, both buyers and sellers are present, allowing for a more even exchange of assets. 

 Efficient Price Delivery and Inefficient Price Delivery.

It is important to note that price delivery is always an unbalanced process in which one side—either buyers or sellers—dominates. 

 

The second type is inefficient price delivery, which occurs when the exchange of assets is uneven in certain price ranges between buyers and sellers. This means that there are areas in the market where orders remain unexecuted or are only partially filled, which is a key sign of inefficient pricing. Inefficient price delivery causes a Fair Value Gap (FVG). 

 

Fair Value Gaps (FVGs)

A Fair Value Gap (FVG) is a formation consisting of three candles where the shadows or wicks of the first and third candles do not overlap each other in both bullish and bearish variants, indicating an imbalance in buying or selling pressure.

 

 A Fair Value Gap (FVG) is a 3 candle pattern where the shadows 

of the first and third candles do not overlap, indicating an imbalance.

 

 A FVG has three levels: the upper and lower boundaries, and the 0.5 level, 

where, ideally, price action should revisit and bounce off, making it a potential entry point for a position.

Regarding the validity of the FVG when it is tested, it’s quite complex because much depends on timing. However, the key point is that price should not close below the lower boundary when the FVG is bullish and should not close above the upper boundary when the FVG is bearish. A close above the upper boundary in a bearish FVG or below the lower boundary in a bullish FVG would be considered an inverted fair value gap, which may signal a continuation of the movement. Everything else is permissible, but much depends on the context. 

 

 Examples of bearish and bullish FVGs.

 

Support and Resistance (SnR)

Support occurs when two candles form on the chart. The level where the bearish candle closes and the bullish candle opens is called Support. This is where buyers show activity and prevent the price from falling lower (Sell and Buy Candles).

Resistance occurs when two candles form on the chart. The level where the bullish candle closes and the bearish candle opens is called Resistance. This is where sellers show activity and prevent the price from rising higher (Buy and Sell Candles).

Order Block (OB)

A Bullish Order Block is a price movement where the Resistance level was broken with subsequent confirmation by the candle body closing above it.

 

A Bearish Order Block is a price movement where the Support level was broken with subsequent confirmation by the candle body closing below it.

 

Rejection Block (RB)

A Rejection Block is a two-candle formation where the range of shadows forms a zone of interest, and it doesn't matter which one is longer or shorter. 

 

In the bullish variant, it begins at the Support level. In the bearish variant, it begins at the Resistance level. 

Fractal Point (FP)

A Fractal Low (FL) is a three-candle formation where the minimum of the middle candle is lower than the minimums of the first and third candles. Five-candle fractals are considered potentially stronger.

A Fractal High (FH) is the opposite three-candle formation, where the middle candle has the highest maximum compared to the adjacent candles.

 

Dealing Range (DR)

The Dealing Range is a price movement that can be identified using two opposing fractal points (High and Low), regardless of direction. This formation displays the balance between buyers and sellers during a specific time period and helps to more clearly define potential zones of interest.

The Dealing Range is divided into two main zones - Premium and Discount with an Equilibrium level in the middle.
 

High Resistance Logic

High Resistance is considered a movement that has interacted with liquidity (Fractal Raid) or inefficiency (FVG rebalance) usually on the same timeframe, resulting in the formation of (OB, RB, FVG), plus a fractal point has formed as a level confirming the extreme. 

 

Reference:
orderbloque (2024) - How do FVG, OB, RB work? (video)

orderbloque (2024)- Full Guide to the Combo Algorithm Trading Strategy. (video)

Richie Naso (2025) - How Algorithms Impact Market Direction: 80% of Breakouts Fail.

Michael J. Huddleston & Jevaunie Daye (2024) - ICT Time Macros & Quarterly Theory.

 

ICT NQ Review of Week  February 23-28, 2025 (video; no forecast). 

How Algorithms Impact Market Direction: 80% of Breakouts Fail | Richie Naso

The first thing you need to truly understand is that algorithms control the stock market; not the large institutional players, not the massive hedge funds, but price auction algorithms. Algorithms are there to create volatility and liquidity; they have no mind, they are programmed to go to technical areas, certain levels, to take out buy and sell orders. The market operates on a day-to-day basis with both premium and discount levels. When the market moves toward a premium level, the algorithms target that area to create liquidity. Conversely, when the market moves lower, the algorithms aim for the discount area to generate liquidity.
 

 Equilibrium Level and Premium -Discount Zones.

Algorithms dictate the direction of the market, especially in the near term. The mathematical equations used in these algorithms are designed by humans, based on historical data. When the market is trending lower and algorithms reach a significant technical level (support/resistance, supply/demand zones, previous highs and lows of sessions, days, weeks, months, imbalances, order blocks, 50%-levels, round numbers, option strike prices) and the market is trending lower, algorithms will activate and target that technical area. They recognize that the area is a support level. They also understand that they can manipulate investor emotions to make them believe that the market is bottoming out. 

 

Premium-Discount Zones for Short and Long Setups.

As a result, when the algorithm hits that technical area, it aims to trigger emotions that lead investors to sell or short in response to what appears to be a breakdown. These breakdowns are often referred to as "failed breakout trades," and they tend not to succeed. In fact, they fail in more than 80% of cases.

 

 » Some of the best trade setups are failed breakouts. «

Why? Because it’s a contrived effort by the mathematical logic of the algorithms, designed to make investors do exactly what the algorithms want. The goal is to get people to go short at the bottom and encourage long investors to sell their positions at the lowest point, clearing the way for an upward movement. First, shorts need to be covered. Then, longs who sold at the bottom will be motivated to buy back shares, creating another emotional impulse. Typically, this leads to a poor trade for those who sold too early.

» The goal is to get people to go long at the top. «

 

The same principle applies in both directions—whether the market is moving up or down. For instance, in a false breakdown, algorithms may manipulate the market to sell. In a false breakout, they may prompt buying. In both cases, the effect is similar: short covering and long investors buying at the wrong time. To sum it up, the algorithms exploit emotional responses. There is no support for short positions when the market is trending down, and the longs who are caught at the top are forced to sell. This creates the momentum for the market to move in the opposite direction.

 » 80% of Breakouts fail. «

This is why some of the best trades are failed breakdowns—buying against technical levels that are collapsing. This is when and where you should buy, while everyone else is being pushed out of the market. You don’t want to short a failed breakdown in a technical area, nor should you buy a breakout in such an area. Instead, you should do the opposite in these situations. 

 

» Algos do what they are programmed to do. They take no prisoners. «

 

My most successful trades, without question, occur when stop orders are triggered. People use stop orders to protect themselves from losses. This is where you should enter the market—against stop orders. If stop orders are triggered and the market has to sell down, you should buy. Conversely, if stop orders are triggered on the way up, you should sell. The key is to position yourself on the other side of stop orders.

 

 » Printing money. That’s what we do. And we do it every day. «

To sum it up, algorithms are written by programmers, and have to be designed to go somewhere. Where do they go? To technical areas. Those algorithms are heading there, without a doubt. They aim to shake out longs and get people to go short or vice versa. So, what do the smart players do who are at the bottom of these algorithms, scooping up all this action? They feed into these people. That's the purpose of algorithms. We take advantage of what they give us. Printing money. That’s what we do. And we do it every day. 

 

You need to know the technicals, the levels, and pay attention to them. Technical areas are borders, and price history is how you identify and track them. Do multi-time frame analysis; understand what failed breakdowns and failed breakouts look like; double bottoms, double tops, pin bars, three-push-patterns, three-bar reversals, and M and W patterns, all the way down to the 1-minute chart. Find out what else VWAP, EMA (9), and Keltner can do for you. Wait for price to get to technical areas, and for reversal setups to form. Price to price, level to level, zone to zone. Don't chase trades; scale into them, as single-entry trades will kill you. Understand position management; know your stop-loss level, take-profit targets, and your R, and take what the market gives you. Consider taking partial profits and holding positions through a session close or daily close. Journal your trades; some of your best trades will be losing trades that help you learn valuable lessons. Keeping things simple is the key to success as a trader.

 

Reference:
Richie Naso's YouTube! Channel. 

Richie Naso @TradeZeroOfficial.

Richie Naso (2023) - Think like a criminal. (video) 

Riz Iqbal (2024) - Richie Naso explains exactly how the Market Algorithm works. (video)

See also: 

orderbloque (2024) - Market Logic is Based on Liquidity, Volume, and Inefficiency.

Abdullah Shah (2024) - Premium and Discount Zones – SMC & ICT Trading.

TTrades (2023) - Discount & Premium - ICT Concepts. (video)

Darya Filipenka (2024) - ICT Draw on Liquidity.

Darya Filipenka (2024) - ICT Optimal Trade Entry (OTE).

Max Singh (2019) - Turtle Soup Trading Strategy.

Jevaunie Daye (2024) - The Quarterly Theory.

Darya Filipenka (2024) - ICT Algorithmic Price Delivery & Time Macros Intro.
Darya Filipenka (2024) - ICT Market Maker Buy Model and Sell Model (MMXM).

Michael J. Huddleston & Jevaunie Daye (2024) - ICT Time Macros & Quarterly Theory.

M & W Wave Patterns │ Arthur A. Merrill

In 1971, Robert A. Levy made the first attempt to systematically classify price patterns. He categorized five-point patterns, defined by price swings influenced by stock volatility, and tested their significance. Although he was unable to identify any substantial forecasting power, he introduced a valuable concept: the five-point categorization of time-price patterns.

» Pick any five consecutive turning points. If the first of the four swings is upward, 

the pattern forms an M. If the first swing is downward, the pattern is a W. «

Arthur A. Merrill, 1984.

 

This method remained dormant for a decade until Arthur A. Merrill revived it and published applicable results in the early 1980s: He employed the same five-point pattern approach, but instead of Levy's volatility filter, he used a rather large 8-percent swing filter in his research study. (Of course, since time and price are fractal, Merrill's patterns are too; they appear on every price swing scale across all timeframes.)

 

Merrill's 16 M and 16 W wave patterns, and their statistical occurrences: Are some of these patterns bullish? 

Are some bearish? When a certain pattern occurred in the past, what happened to prices after the pattern?

Merrill organized five-point patterns based on the sequential order of points from high to low, creating a structured taxonomy of "Ms" and "Ws". He identified 32 distinct patterns, grouping them into two categories: 16 resembling a capital M and 16 resembling a capital W. He then highlighted six subcategories, based on classical chart pattern names used by market technicians:

Uptrends                                            M15, M16, W14, W16
Downtrends                                      M1, M3, W1, W2
Triangle                                               M13, W4
Head and Shoulders                      W6, W7, W9, W11, W13, W15
Inverted Head and Shoulders    M2, M4, M6, M8, M10, M11
Broadening                                        M5, W12 

For example, an M1 is a strongly descending pattern, while the middle patterns, M8 and M9, are flat. An M16 is a strongly ascending pattern. Similarly, a W1 is a descending pattern, the middle Ws are flat, and a W16 is an ascending pattern.

 

So, what is the practical application and benefit of Merrill's weird-looking M & W Wave Patterns in trading? They can be used to identify support/resistance levels, determine areas of interest, anticipate market direction and reversals, project extensions, define entry and exit points, and manage risk. 

 

» There are only two ways a short-term high or low is broken. «

Larry Williams,  2000.

How? You may want to watch the following video, as well as review the references and recommendations provided below.

 

M & W Patterns: A Complete Guide to Market Structure, 

Change of Trend, Entries & Targets.

 

Reference:

Arthur A. Merrill (1984) - Behavior of Prices on Wall Street (2nd Ed.).

Arthur A. Merrill (1980) - M and W Wave Patterns.

Arthur A. Merrill (1977) - Filtered Waves - Basic Theory.

 

See also: 

Larry Williams (2000) - Swing Points as Trend Change Indication. 

Larry Williams (2022) - How Markets Move: The Natural Cycle of Range Change.  

Andrey Emelyanov (2014) - Evolution and Mutation of Dynamic Five-Point Wave Patterns. 

Michael J. Huddleston (2022) - Trading Market Reversals. (video) 

Aksel Kibar (2024) - The 8 Most Common Chart Patterns & How to Trade Them.

Memo from the Chief Economist: Lament of a Bear | David Rosenberg

One can reasonably debate whether the stock market has risen exponentially but there is no arguing that the surge in the S&P 500 these past two years has been nothing short of extraordinary. And it has clearly gone much further than I thought it would, especially in these past twelve months, and so at this point, it is worth the time and effort to discuss and interpret the message from the market.
 

 » Smells of capitulation. «

The bottom line: Tip the hat to the bulls who have, after all, been on the right side of the trade, and provide some rationale behind this powerful surge. This is not some attempt at a mea culpa or a throwing in of any towel, as much as the lament of a bear who has come to grips with the premise that while the market has definitely been exuberant, it may not actually be altogether that irrational. Read on.

Quoted from:
David Rosenberg (December 6, 2024) - Memo from the Chief Economist: Lament of a Bear. 

 

See also:

Tom McClellan (December 6, 2024) - Presidential Cycle Effects with a New President.
Steve Miller (December 5, 2024) - S&P 500 Cycle Analysis - Time and Price Projections Update.

BlackRock Investment Institute (December 4, 2024) - Due to 'Mega Forces': No More Bust, Only Boom. Outlook 2025.

Jeffrey A. Hirsch (December 4, 2024) - December Stock Market Performance in Election Years. 

Tom DeMark (November 18, 2024) - US Stock Market Nearing a Top Similar to 1929.
Lars von Thienen (November 1, 2024) - The 41-Month Kitchin Cycle Topping Patterns in US Stocks.
Richard Smith (October 29, 2024) - Equities Endgame? Spectrum Cycle Analysis of US Indices.

D'onte Goodridge (2024) - Structural Characteristics of Bullish and Bearish Months.

Trading Major News Events | D'onte Goodridge

News events typically inject momentum into the market, often prompting traders to anticipate where price might trend in response to the news. Making educated predictions about these movements is a common strategy rooted in technical analysis. Position yourself AFTER major news releases (NFP, CPI, PPI, PMI, FOMC etc.) with either a Pump & Dump or a Dump & Pump trading setup.

Sell Scenario/Setup: Wait for the buy side liquidity pool on the 15 minute timeframe to be raided first. After that, go to the 1 minute timeframe entry above the killzone's opening price. Then, anticipate that price will revert back down to a sell side liquidity level.

 

 

Buy Scenario/Setup: Wait for the sell side liquidity pool on the 15 minute timeframe to be raided first. After that, go to the 1 minute timeframe entry below the killzone's opening price. Then, anticipate that price will revert back up to a buy side liquidity level.

 

When price moves above the opening price of a killzone, it's in a premium. This is where to find ideal sell entries. 

When price moves below the opening price of a killzone, it's in a discount. This is where to find ideal buy entries.

Reference:
D'onte Goodridge (July 14, 2024) - Trading News Events. (video)

 

 Major news July 15–19 (UTC -6).

Structural Characteristics of Bullish and Bearish Months | D'onte Goodridge

Traders want to find trending markets but often fail to see and understand the structural characteristics of bullish and bearish months. Both move in a similar fashion but inverse to one another. Here are the characteristics for the formation of a bullish month:

 

 

The first example is a daily chart of US Dollar versus Japanese Yen (USDJPY) during February 2023. The market was trending up. It was a bullish month. Let's identify the five key factors to a bullish month:

1. Price moves below the monthly opening price.
2. A swing low forms below the month's open.
3. Price purges a previous daily low (PDL) and reverses back to a previous daily high (PDH).
4. The market creates a market structure shift (MSS) to the upside and an Imbalance or Fair Value Gap (FVG).
5. Higher swing highs and higher swing lows form.

 

Looking at the daily candles in the USDJPY chart, we see the methodical sequence of a Bullish Month developing:
 

1. Price was movesg below the monthly opening price. Price stops below it, runs up, drops below it, runs up and continues the bullish trend.
2. A swing low below the month's open forms. This is a swing low because the candle on the left has a higher low and the candle on the right has a higher low, hence the low in the middle is the lowest point. To form a swing low  only takes three bars.
3. Price purges a previous low and works back to a previous high. The following day price reverses back to the previous daily high, all happening within a three bar setup, creating a swing low, which is a purge on the previous daily low and a reversal back to a previous daily high.
4. Next the market creates a shift to the upside with speed through a previous swing high and a FVG.
5. And price created a new swing high and a higher swing low.

The next example is a daily chart of Apple during January 2023. The same five criteria for a Bullish Month were met:

 

Now let's look at the five key factors to a Bearish Month:

1. Price moves above the monthly opening price.
2. A swing high forms above the month's open.
3. Price purges a previous daily high and reverses back to a previous daily low.
4. The market creates a shift to the downside and a FVG.
5. Lower swing highs and lower swing lows form.

 

The first example is a daily chart of British Pound versus US Dollar during August 2022. The market was trending down. Identify the above listed five criteria for the formation of a Bearish Month:

 

 

The last example is a daily chart of Gold during February 2023. Gold was in a down trend. Identify the structural criteria for the formation of a Bearish Month:

 

Reference:
D'onte Goodridge a.k.a. Forensic Forex (2023) - Characteristics of Bullish & Bearish Months. (video)  

 

 

 

See also:
Larry Williams (1998/2011) - Long-Term Secrets to Short-Term Trading, 2nd Edition.

 Michael J. Huddleston (2017) - ICT Weekly Range Profiles.

Daye (2023) - The Quarterly Theory.