What Is a Liquidity Sweep in Trading and How to Spot It

TL;DR

Liquidity sits above highs and below lows, because retail traders place buy orders above highs and sell orders below lows, and stop losses cluster there too. Market makers push price past those levels to fill large orders at the best price, then reverse. Spotting where that liquidity rests is the first step to trading reversals instead of getting stopped out.

Transcript

I have made over a million dollars in profit throughout my entire day trading career and every single trade that I take is based off of liquidity sweeps today I'm going to break down how you guys can spot liquidity sweeps within the market so that you guys can start taking profitable trades based off of liquidity but before I can send you guys off ... Read More

Key Insights

• Liquidity lies above highs and below lows within the market, because those are the price areas where a large concentration of retail buy and sell orders and stop losses accumulate, giving large players enough opposing volume to fill their positions.
• A high is a two-candlestick pattern consisting of an up candle followed by a down candle. Continuous upward moves never create a peak, because a high requires a move up and then a move down to form the actual level.
• A low within the market is formed by a move down followed by a move up. Continuous downward moves never establish the actual low, since a small move up afterward is what confirms the trough exists on the chart.
• Two separate groups of traders create buy orders above highs: breakout traders buying because higher highs and higher lows signal trend continuation, and short sellers whose stop losses above the high force them to buy back at a worse price.
• Below lows, sellers pile in expecting the downtrend to continue lower, while traders who bought the small move up have stop losses beneath those lows, forcing them to sell their positions at a lower price when triggered.
• Market makers cannot fill large orders at a single mid-trend level because the market lacks the liquidity there. Filling sequentially would push price against them, giving progressively worse entry prices on every subsequent fill.
• Pushing price above highs lets market makers fill sell orders at the highest available price against the retail buy orders sitting there, which is why price often stays elevated briefly before reversing downward.
• The best trades are found at reversals rather than in the middle of an existing trend, because catching the turning point captures far more of the move than trying to trade a small continuation leg.

Questions & Answers

Q: What is a liquidity sweep in trading?

A liquidity sweep occurs when price is pushed past a high or below a low to reach the concentration of orders resting there, allowing market makers and the algorithm to fill a substantial amount of their positions before reversing price. Above highs there are many retail buy orders, so sweeping that area lets large players fill sell orders at the highest price. Below lows there are many sell orders, so sweeping down lets them fill buy orders at the best price before price moves up.

Q: Where does liquidity lie within the market?

Liquidity lies above highs and beneath lows. Above highs, retail traders place buy orders because higher highs and higher lows suggest the uptrend continues, and sellers from the prior move down have stop losses there that force them to buy back at a higher price. Beneath lows, traders place sell positions expecting the downtrend to continue, and buyers who entered on a small move up have stop losses that force them to sell back at a lower price. Both clusters create the volume large players need.

Q: How do you identify a high and a low on a chart?

A high is a two-candlestick pattern made of a move up followed by a move down, meaning an up candle and then a down candle. If price only moves up continuously, there is no peak formed. A low is the opposite: a move down followed by a move up. If price only continues moving down, the actual low has not formed yet, because it needs that small move up afterward to confirm the level. This makes liquidity one of the easiest concepts to identify on the chart.

Q: Why do market makers push price past highs before reversing?

Market makers are described as greedy and always want the most optimal price for their entries. If they filled sell orders in the middle of an uptrend, price would move down with each fill, so every subsequent order would get a worse price, and there would not be enough liquidity to fill everything. Above highs there are many retail buy orders to sell into, so they can fill a substantial amount of sell orders at the highest price, keep price elevated briefly while filling, and then price moves down and they profit.

Q: Why do traders keep getting stopped out right before price moves in their direction?

That pattern happens because stop losses sit exactly where liquidity rests, above highs for sellers and beneath lows for buyers. When price sweeps those levels to fill large orders, retail positions get stopped out first, and then price reverses in the direction the trader originally wanted. The speaker experienced this repeatedly before learning about liquidity, losing funded accounts, thousands of dollars, and confidence in the market, because he entered trades without knowing where liquidity was located.

Q: What was the London session fake out strategy?

When trading Forex, the speaker noticed that nearly every trade he took would get stopped out right as the London session opened, and then price would rip in the direction he originally wanted for the rest of the day. He built a strategy around this pattern and called it the London session fake out. At the time he had no idea what liquidity was, but he later realized that what he was observing was liquidity being swept at the London open to fill orders for the move the market intended to make.

Q: Why should traders focus on reversals instead of trend continuations?

The speaker argues the best trades are more often the reversal trades taken at the end of a trend rather than small continuation moves. In an uptrend, trying to catch a small measly move is far less profitable than catching the top where a new downtrend begins. In a downtrend, catching the actual low that starts a new uptrend produces much more money than trading a small leg down. Liquidity sweeps are the tool that helps identify those turning points.

Q: Is knowing where liquidity lies enough to trade liquidity sweeps?

No. The speaker states explicitly that you cannot simply press buy every time a low gets pushed under, or press sell every time a high gets pushed above. Understanding where liquidity lies is only the first step of being able to take trades off liquidity sweeps, and only one part of understanding the charts fully. He also emphasizes understanding what liquidity actually is and why it causes the moves it makes, telling students that if you do not know why you are taking a trade, you probably should not be taking it.

Summary & Key Takeaways

• A high is a two-candle pattern: a move up followed by a move down. A low is a move down followed by a move up. Without the small opposite move afterward, no actual peak or trough is formed, so these simple candlestick structures are what mark the levels where liquidity collects.

• Retail traders buy above highs because higher highs and higher lows signal an uptrend continuing, and sellers who entered on the prior move down are forced to buy back at a higher price when their stop losses trigger. The mirror happens below lows, where breakout sellers and stopped-out buyers both sell.

• Market makers are greedy and want the most optimal entry price. Filling sell orders on the way up would give progressively worse fills because the market lacks the liquidity to absorb them all at once. Pushing price above highs lets them fill a substantial amount of sell orders at the highest price, then price drops.