SMC Trading Strategies
Lesson 2
Finding the Draw on Liquidity (DOL)
When price moves, it's always targeting an untouched area of Liquidity, we call this the Draw on Liquidity.
Published by Trader Tips,
Published by Trader Tips,
Chapter 1
What is a Draw on Liquidity (DOL)?
One of the core fundamentals of SMC is the theory that price is always delivering from one Liquidity Pool, to another Liquidity Pool.
This means that once a Swing Point or FVG has been hit, it will then target a new Swing Point or FVG.
Price repeatedly delivering from one Liquidity Pool, to another Liquidity Pool (Swing Points and FVGs).
The Draw on Liquidity (DOL) refers to the current Swing Point or FVG that we believe the market is targeting.
The Draw on Liquidity will always be a Key Level (Swing Point or FVG) because these are the levels that traders typically place their stop-loss orders around, which is what makes them areas of targeted Liquidity for Smart Money.
What is a Draw on Liquidity (DOL)?
One of the core fundamentals of SMC is the theory that price is always delivering from one Liquidity Pool, to another Liquidity Pool.
This means that once a Swing Point or FVG has been hit, it will then target a new Swing Point or FVG.
Price repeatedly delivering from one Liquidity Pool, to another Liquidity Pool (Swing Points and FVGs).
The Draw on Liquidity (DOL) refers to the current Swing Point or FVG that we believe the market is targeting.
The Draw on Liquidity will always be a Key Level (Swing Point or FVG) because these are the levels that traders typically place their stop-loss orders around, which is what makes them areas of targeted Liquidity for Smart Money.
Chapter 2
New Phase after DOL target is reached
When price has delivered to a Key Level, it can either:
Create a Continuation Move.
Create a Reversal Move.
Continuation Move vs Reversal Move, after mitigating Key Level.
A Continuation Move will see price continue pushing in the same direction that it was previously.
A Reversal Move will see price create a 'V' shape and push in the opposite direction to it's previous direction.
Price Action transitioning from Bullish to Bearish after Liquidity Sweep of Swing High.
When price creates a reversal move after hitting a Key Level, this is when we can assume that the Draw on Liquidity target has been hit and a new phase of price action is now active, with a new Draw on Liquidity target.
New Phase after DOL target is reached
When price has delivered to a Key Level, it can either:
Create a Continuation Move.
Create a Reversal Move.
Continuation Move vs Reversal Move, after mitigating Key Level.
A Continuation Move will see price continue pushing in the same direction that it was previously.
A Reversal Move will see price create a 'V' shape and push in the opposite direction to it's previous direction.
Price Action transitioning from Bullish to Bearish after Liquidity Sweep of Swing High.
When price creates a reversal move after hitting a Key Level, this is when we can assume that the Draw on Liquidity target has been hit and a new phase of price action is now active, with a new Draw on Liquidity target.
Chapter 3
Reversal Phase and Expansion Phase
The easiest way to form a Directional Bias (Bullish or Bearish) for whether we should be looking for long setups or short setups, is to determine whether we are currently in a Reversal Phase or an Expansion Phase.
Swing High/Low creation (1-3) followed by Expansion away (4+).
A Swing Point (Swing High or Swing Low) is a 3 candle pattern where the high/low of the Swing Point is formed in the 2nd candle.
Candle 4 and the candles that follow it are what we consider the Expansion Phase.
Bullish Reversal (new Swing Low) followed by Bullish Expansion.
The 'Reversal Phase' is the creation of the new Swing Point.
Reversal Phases are only valid after hitting a Key Level. If a new Swing Point forms in the middle of a range without hitting a Key Level, whilst it still can still cause an unexpected Reversal, we should always remain cautious if a Key Level hasn't been mitigated.
The 'Expansion Phase' is the move away that follows the reversal, targeting the new Draw on Liquidity level.
Once a new Key Level has been hit during the 'Expansion Phase', we then wait to see how price reacts. Will it create a Continuation, or a Reversal?
Reversal Phase and Expansion Phase
The easiest way to form a Directional Bias (Bullish or Bearish) for whether we should be looking for long setups or short setups, is to determine whether we are currently in a Reversal Phase or an Expansion Phase.
Swing High/Low creation (1-3) followed by Expansion away (4+).
A Swing Point (Swing High or Swing Low) is a 3 candle pattern where the high/low of the Swing Point is formed in the 2nd candle.
Candle 4 and the candles that follow it are what we consider the Expansion Phase.
Bullish Reversal (new Swing Low) followed by Bullish Expansion.
The 'Reversal Phase' is the creation of the new Swing Point.
Reversal Phases are only valid after hitting a Key Level. If a new Swing Point forms in the middle of a range without hitting a Key Level, whilst it still can still cause an unexpected Reversal, we should always remain cautious if a Key Level hasn't been mitigated.
The 'Expansion Phase' is the move away that follows the reversal, targeting the new Draw on Liquidity level.
Once a new Key Level has been hit during the 'Expansion Phase', we then wait to see how price reacts. Will it create a Continuation, or a Reversal?
Chapter 4
Framework Models of Expansions after Reversals
Using the logic of IRL to ERL, there are 4 framework model variations of how we ideally would like to price behave after a new Swing Point is created after mitigating a Key Level.
One important rule is that we always assume that the next immediate Key Level is the current Draw on Liquidity target because it's the first Key Level that it will encounter.
After price has expanded and the first most immediate Key Level is hit, we can then revaluate whether it will continue the Expansion Move lower or create a new Reversal Move, depending on how it reacts to the level.
Model 1: Reversal from Mitigated Swing High
New Swing High confirmation acts as a Bearish Reversal signal.
If the market had pushed up, hit an old Swing High (ERL), swept it and created a new Swing High, this tells us that the mitigated Swing High was a valid Draw on Liquidity target.
So with the Draw on Liquidity target being hit and a new Swing High having formed, we can use this as a Bearish Reversal Signal to anticipate that the next move price will make will be a Bearish Expansion move downwards.
In terms of where we think this Bearish Expansion move will target, we want to find the next immediate Key Level that is below the current price, which could be a Bullish FVG or a Swing Low.
Model 2: Reversal from Mitigated Swing Low
New Swing Low confirmation acts as a Bullish Reversal signal.
If the market had pushed down, hit an old Swing Low (ERL), swept it and created a new Swing Low, this tells us that the mitigated Swing Low was a valid DOL target.
With the DOL target being hit and a new Swing Low having formed, we can use this as a Bullish Reversal Signal to anticipate that the next move price will make will be a Bullish Expansion move upwards.
In terms of where we think this Bullish Expansion move will target, we want to find the next immediate Key Level that is above the current price, which could be a Bearish FVG or a Swing High.
Model 3: Reversal from Mitigated Bearish FVG
Respected Bearish FVG - Bearish Reversal Signal.
If the market had pushed up into the area of a Bearish FVG (IRL), respected it as an area of resistance and created a new Swing High, this tells us that this mitigated Bearish FVG was a valid DOL target.
With the DOL target being hit and a new Swing High formed, we can use this as a Bearish Reversal Signal to anticipate that the next move price will make will be a Bearish Expansion move downwards.
When a Bearish FVG is respected as resistance, we always assume that the next Draw on Liquidity target will be a Swing Low, using the IRL to ERL theory.
Model 4: Reversal from Respected Bullish FVG
Respected Bullish FVG - Bullish Reversal Signal.
If the market had pushed down into the area of a Bullish FVG (IRL), respected it as an area of support and created a new Swing Low, this tells us that this mitigated Bullish FVG was a valid DOL target.
With the DOL target being hit and a new Swing Low having formed, we can use this as a Bullish Reversal Signal to anticipate that the next move price will make will be a Bullish Expansion move upwards.
When a Bullish FVG is respected as support, we always assume that the next Draw on Liquidity target will be a Swing High, using the IRL to ERL theory.
Framework Models of Expansions after Reversals
Using the logic of IRL to ERL, there are 4 framework model variations of how we ideally would like to price behave after a new Swing Point is created after mitigating a Key Level.
One important rule is that we always assume that the next immediate Key Level is the current Draw on Liquidity target because it's the first Key Level that it will encounter.
After price has expanded and the first most immediate Key Level is hit, we can then revaluate whether it will continue the Expansion Move lower or create a new Reversal Move, depending on how it reacts to the level.
Model 1: Reversal from Mitigated Swing High
New Swing High confirmation acts as a Bearish Reversal signal.
If the market had pushed up, hit an old Swing High (ERL), swept it and created a new Swing High, this tells us that the mitigated Swing High was a valid Draw on Liquidity target.
So with the Draw on Liquidity target being hit and a new Swing High having formed, we can use this as a Bearish Reversal Signal to anticipate that the next move price will make will be a Bearish Expansion move downwards.
In terms of where we think this Bearish Expansion move will target, we want to find the next immediate Key Level that is below the current price, which could be a Bullish FVG or a Swing Low.
Model 2: Reversal from Mitigated Swing Low
New Swing Low confirmation acts as a Bullish Reversal signal.
If the market had pushed down, hit an old Swing Low (ERL), swept it and created a new Swing Low, this tells us that the mitigated Swing Low was a valid DOL target.
With the DOL target being hit and a new Swing Low having formed, we can use this as a Bullish Reversal Signal to anticipate that the next move price will make will be a Bullish Expansion move upwards.
In terms of where we think this Bullish Expansion move will target, we want to find the next immediate Key Level that is above the current price, which could be a Bearish FVG or a Swing High.
Model 3: Reversal from Mitigated Bearish FVG
Respected Bearish FVG - Bearish Reversal Signal.
If the market had pushed up into the area of a Bearish FVG (IRL), respected it as an area of resistance and created a new Swing High, this tells us that this mitigated Bearish FVG was a valid DOL target.
With the DOL target being hit and a new Swing High formed, we can use this as a Bearish Reversal Signal to anticipate that the next move price will make will be a Bearish Expansion move downwards.
When a Bearish FVG is respected as resistance, we always assume that the next Draw on Liquidity target will be a Swing Low, using the IRL to ERL theory.
Model 4: Reversal from Respected Bullish FVG
Respected Bullish FVG - Bullish Reversal Signal.
If the market had pushed down into the area of a Bullish FVG (IRL), respected it as an area of support and created a new Swing Low, this tells us that this mitigated Bullish FVG was a valid DOL target.
With the DOL target being hit and a new Swing Low having formed, we can use this as a Bullish Reversal Signal to anticipate that the next move price will make will be a Bullish Expansion move upwards.
When a Bullish FVG is respected as support, we always assume that the next Draw on Liquidity target will be a Swing High, using the IRL to ERL theory.
Chapter 5
How we trade Swing Points and Expansions
Expansions Phases are the easiest to trade because we just 'follow the trend' until we reach a new Key Level. Then we wait to see if a Continuation or a Reversal occurs.
When it comes to Swing Points, we usually want to wait for a new Swing Point to be confirmed (with the exception of a CRT Candle formation). We use the Swing Point as a signal of a Reversal.
Then we look within the 4th Candle (1st Candle after Swing Point) for trade setups on the lower timeframes, with the expectation that the candle will develop as an Expansion Candle.
There are 3 important Candle Formation Framework Models that we need to understand when it comes to trading Reversals and Expansions:
CRT Candle (Swing Point Formation).
Engulfing Candle (Swing Point Formation).
Expansion Candle (Continuation Formation).
We will be covering each of these frameworks individually in the next few lessons.
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