In the world of trading, liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. When a particular price level is tested multiple times, it indicates that there's a significant amount of buying and selling interest at that level. This creates what we call a liquidity zone - a sort of hotspot for trading activity.
Imagine it like a busy marketplace where buyers and sellers constantly gather. As the price approaches this zone, it's as if there's a magnetic force pulling it in. Traders notice this and anticipate that there will be opportunities to execute trades there. This anticipation further reinforces the attractiveness of the zone, creating a self-fulfilling prophecy where the price indeed tends to gravitate towards it.
So, these liquidity zones become crucial reference points for traders. They often strategize around them, looking for opportunities to enter or exit positions based on how the price behaves when it approaches these levels.
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