Liquidity: why price hunts your stop loss

Large players cannot buy or sell a huge position without someone on the other side. Liquidity is that other side: pending orders and, most of all, stop losses.

A buy-side stop loss is a sell order waiting to trigger. A sell-side stop is a buy order. Clusters of stops are pools of guaranteed orders, and price is often drawn towards them.

• Above equal highs and below equal lows, the "double top" and "double bottom" everyone sees.
• Above and below obvious swing points and trendlines.
• Around round numbers and the previous day or week high and low.
• At the high and low of the Asian session, before London opens.

A liquidity sweep is a quick push through a pool of stops, followed by a sharp reversal. Retail traders see a breakout; smart money sees the orders it needed to fill.

During the Asian session, gold drifts in a tight range and forms two highs at almost the same price. Many traders sell there with stops just above, and breakout traders place buy stops above too.

London opens and price pushes through the highs within minutes. Breakout traders buy, short sellers are stopped out, and all those orders give larger sellers the buy orders they need. The candle closes back below the highs, and the next hour falls steadily.

A patient trader with a bearish bias was not chasing the breakout. They were waiting for exactly this: the sweep, a close back inside, and a shift in lower timeframe structure, with a stop above the sweep high.

• Placing your stop exactly where everyone else does. Give it room beyond the obvious level, and size down to keep the risk the same.
• Assuming every break is a sweep. Sometimes price breaks and keeps going. Wait for the close and the reaction.
• Forgetting the target. The opposite pool of liquidity is often where the move ends.
• Trading sweeps against the trend. Sweeps in the direction of the higher timeframe bias are far cleaner.

• Previous day high and low (PDH, PDL): the most watched levels of the day.
• Asia high and low: the quiet overnight range that London likes to run.
• Equal highs and lows (EQH, EQL): double tops and bottoms, full of stops.
• Weekly high and low: bigger pools that matter on H4 and the daily chart.
• Trendline liquidity: stops below a clean rising trendline or above a falling one.

Mark these levels before the session starts. When price reaches one, you already know what to watch for: a sweep and a close back inside, or a clean break.

In a trading plan, liquidity answers two questions. Where is price likely to go next (towards the nearest untouched pool)? And where should my own stop not be (right on top of everyone else's)?