Liquidity: buy-side, sell-side and sweeps

What liquidity is

To buy or sell a large amount you need someone on the other side. Orders cluster in predictable places: traders' stop losses sit above recent highs (for those who are short) and below recent lows (for those who are long). These orders are 'liquidity': fuel for large participants who need to execute significant size.

It is a plausible explanation of why price often 'goes to take' the obvious highs and lows. It is a hypothesis, not a law: always remember that.

Buy-side and sell-side

• Buy-side liquidity: above the highs (sellers' stops and buyers' breakout orders)
• Sell-side liquidity: below the lows (buyers' stops and sellers' breakout orders)

Where it accumulates

• Equal highs and equal lows: two or more highs (or lows) at almost the same level
• Previous day, week and month highs and lows
• Session highs and lows (for example the Asian range)
• Round numbers and heavily touched trendlines

The sweep

A sweep (or 'stop hunt') happens when price pierces a liquidity level with its wick and then returns, closing on the opposite side. Unlike a real break, the candle closes back inside the range.

A sweep alone is not a signal. It becomes interesting when followed by a market structure shift (MSS) in the opposite direction, as we will see in the trading model of module 3.

Beware of false signals

Not every break is a sweep. Often price pierces a level and keeps going. A liquidity level is an area where you expect activity, not a guarantee of reversal.

Exercise

• On M15 highlight the previous day's highs and lows and the Asian range for 20 days
• Count how many times price swept them during London or New York, and how many times it continued
• Write down the percentage: it is your statistical base, not a feeling