Overview
This lecture explains liquidity sweeps in trading, how to identify them on charts, and outlines a trading approach using liquidity sweeps for profitable trades.
Understanding Liquidity and Its Location
- Liquidity refers to resting buy and sell orders in the market.
- Liquidity is found above highs (buy stops) and below lows (sell stops) on price charts.
- Highs are formed by an up candle followed by a down candle (local peak).
- Lows are formed by a down candle followed by an up candle (local bottom).
- Retail traders often set buy orders above highs and sell orders below lows, providing liquidity for market makers.
The Role of Liquidity Sweeps
- A liquidity sweep occurs when price moves past a high or low, triggering resting orders.
- Market makers use these liquidity pools to fill large buy or sell positions at optimal prices.
- Sweeping liquidity often leads to a reversal or significant move in the opposite direction.
Identifying and Trading Liquidity Sweeps
- Mark out highs and lows on various timeframes (4H, 1H, etc.) as potential liquidity zones.
- Liquidity sweeps can be identified on any timeframe; they are price fractal.
- A valid liquidity sweep shows a strong reaction (price reversal) after taking out a high or low.
- Do not blindly buy/sell on every sweep; confirmation is needed (break of structure, fair value gap, etc.).
- Use session opens (e.g., New York 9:30 AM, London) to identify likely times for sweeps and reversals.
- Scale down to lower timeframes after a sweep for entry confirmation.
- Exit trades at the next liquidity zone (next high/low).
Example Approach to Liquidity Sweep Trades
- Mark session open and high-timeframe liquidity zones.
- Wait for price to sweep a marked high or low.
- Look for confirmation (such as break of structure or order block) on lower timeframe.
- Enter trade with stop loss beyond the swept level.
- Target the next opposite liquidity zone for take profit.
Key Terms & Definitions
- Liquidity — Resting buy or sell orders above highs and below lows in the market.
- Liquidity sweep — The process of price moving past a high or low and triggering these resting orders, often causing reversals.
- Buy side liquidity — Buy orders above highs.
- Sell side liquidity — Sell orders below lows.
- Break of structure — Price action that confirms a reversal after a sweep.
Action Items / Next Steps
- Practice marking highs and lows on your trading charts.
- Identify session opens and observe how price reacts around liquidity zones.
- Wait for confirmation before entering trades after a liquidity sweep.
- Review bootcamp or course material for confluence methods like break of structure or fair value gap if needed.