The former forward believes Brendan Rodgers should be criticised for failing to replace Luis Suarez or adapt his side's style.
The Reds needed a penalty shoot out to beat League Two side Carlisle in the Capital One Cup on Wednesday, the latest in a series of disappointing performances from the side.
They are winless in three games in the Premier League, having lost to West Ham and Manchester United and then drawn with Norwich City at Anfield last time out.
As a result of this wobble, manager Brendan Rodgers finds himself under increased pressure at the club, and Nicholas has questioned their lack of a set approach - such as the one they had two years ago when they went agonisingly close to taking the title.
“What are the principles of their game at the moment?” he said to Sky Sports.
"The identity of Liverpool 18 months ago was speed and movement, in the first 20 minutes the game could be over. What is their style now? I don't really know what it is.”
Rodgers must come in for some criticism
However, the former Arsenal forward believes that it would be nonsensical to get rid of Rodgers at this stage, although he says the manager must accept his share of the criticism.
The Reds boss was backed heavily in the summer, bringing in a whole host of new faces to try and revamp a squad that struggled last season following the departure of Luis Suarez.
And Nicholas says Rodgers must take blame for not suitably replacing the Uruguayan, or transforming the side’s system to suit the players at his disposal.
“I don't think it would be sensible to think about getting rid of him,” he added.
"Partly he is responsible because he must replace these people when he knows they are leaving. You need to buy something similar or you need to transfer your style, just transform it a little touch.”