Overview
This lecture explains how to identify and trade using liquidity sweeps in financial markets, focusing on spotting liquidity zones and entering trades at optimal reversal points.
Understanding Liquidity in the Market
- Liquidity refers to resting buy and sell orders above highs and below lows in the market.
- Highs form from a move up then down (two candlestick pattern); lows from a move down then up.
- Retail traders typically buy above highs in uptrends and sell below lows in downtrends, placing stop losses beyond these points.
- Market makers use these zones to fill large orders at optimal prices, often causing price reversals.
Why Liquidity Matters for Trading
- Liquidity zones signal where potential price reversals may occur due to the filling of large orders.
- Trades are most profitable when entered at liquidity sweeps—market moves past a high or low, fills orders, then reverses.
- Simply knowing liquidity zones isn’t enough; confirmation is required before entering trades.
Identifying Liquidity and Liquidity Sweeps
- Mark out all significant highs and lows on various timeframes (e.g., 4H, 1H, 15m).
- Liquidity is present above highs (buy-side) and below lows (sell-side).
- Liquidity sweep occurs when price breaches a high or low, fills pending orders, and then reverses direction.
- Use chart examples to spot sweeps: price moves above/below a key level, then rapidly reverses.
Executing Trades Based on Liquidity Sweeps
- First, identify your trading session (New York, London, or Asian) and mark session opens.
- Mark significant liquidity draws (highs/lows) on higher timeframes, then refine on lower timeframes.
- Wait for price to sweep a liquidity zone and watch for a reaction (e.g., big reversal candle).
- Confirm reversals with additional signals like break of structure or fair value gaps.
- Enter trades on confirmation, with stops above/below recent highs/lows and targets at new liquidity draws.
Key Terms & Definitions
- Liquidity — resting buy/sell orders above highs and below lows in the market.
- Liquidity Sweep — when price moves beyond a high/low, fills orders, and then reverses.
- Buy-Side Liquidity — resting buy orders above recent highs.
- Sell-Side Liquidity — resting sell orders below recent lows.
- Break of Structure — a price movement that shifts the market's direction, confirming a reversal.
Action Items / Next Steps
- Mark session opens and significant highs/lows on your trading charts.
- Practice identifying liquidity sweeps and wait for confirmation before entering trades.
- Review additional materials or courses for deeper understanding of confluences and confirmation signals.