Welcome To Street Investment
By Admin
Posted on November 28, 2024
So now we are going to understand liquidity sweep. In this entire SMC series, we have covered all the topics of SMC in great detail and explained them thoroughly. That’s why if you want to understand any topic in detail, you can go to the article section and read about it.
In this article, we will learn about liquidity sweep, where we will discuss what liquidity sweep is, understand its zones, explore what happens during a liquidity sweep, and differentiate between liquidity sweep, liquidity grab, and change of character. We will also look into why it happens, how to trade it, and the trading strategies associated with it.
To understand liquidity sweep, make sure to read the entire article.
learn with pro trader 100% free and fast response
First, understand that liquidity means orders. Liquidity = orders. It refers to the availability of buy and sell orders in the market. High liquidity means there are many orders, while low liquidity means fewer orders.
A liquidity sweep occurs when the price breaks a support or resistance level, but its main purpose is to trigger the stop losses and pending orders in that area.
This is a part of SMC (Smart Money Concepts) where it is explained how big players often manipulate the market to capture liquidity. They do this by triggering stop losses, creating a scenario where retailers start trading in the opposite direction. However, the true target of these big players is usually in the exact opposite direction.
So, liquidity zones are areas where a significant amount of buying and selling has taken place. These zones typically hold a lot of orders, making them key areas for market movements.
A liquidity sweep is a process involving several events in the market. It begins with the formation of a buying or selling zone, often referred to as supply and demand zones, which are areas where the market has a higher probability of moving up or down. However, when the market reaches one of these zones, instead of following the expected direction, it creates a breakout and hits the stop losses of traders.
This is primarily done by big players because their orders are in massive quantities. To ensure their maximum orders are filled, they initiate a fake breakout. As retailers start entering trades, the orders of these big players begin to get filled—but in the opposite direction of the retailers’ trades.
get helpful insight about liquidity sweep (free)
Liquidity grab and liquidity sweep are essentially the same concept; the difference lies only in the terminology.
First, let’s understand liquidity sweep. It involves the entire process I just explained: how supply and demand zones are created, followed by a fake breakout, and then a movement in the opposite direction. This entire sequence of events is what we call a liquidity sweep.
However, liquidity grab is a part of the overall liquidity sweep process. It occurs specifically after the fake breakout, when either stop losses are hit or retailers take trades in the direction of the fake breakout. At this point, big players act in the opposite direction, solely to grab liquidity. So, liquidity grab is just one step in the entire liquidity process.
Another key difference is that in a liquidity sweep, after the fake breakout, the price tends to stay in that zone for some time before moving in the opposite direction.
In contrast, during a liquidity grab, it usually happens with a single candlestick that forms a long wick. This wick triggers orders, hits stop losses, and immediately moves in the opposite direction without lingering in the breakout zone.
A liquidity sweep is something that is intentionally planned. The purpose of doing this is to ensure that the huge quantities of institutional traders get filled.
Understand this in detail: unlike regular traders, big players don’t trade in small amounts or quantities. They trade in such huge quantities that the number of digits in your phone number might seem fewer in comparison!
Such large quantities require equally significant buying or selling in the market to execute their trades. That’s why these big players resort to market manipulation.
The difference between the two lies in their terminology.
The first is liquidity sweep, which refers to clearing out all the pending orders and stop losses in a specific area.
The second is liquidity run, where after a breakout, the price continues to move in the same direction rather than reversing.
Let’s understand this in detail:
These concepts highlight how market movements aren’t always straightforward and why understanding market behavior is crucial for effective trading.
Trading liquidity sweep directly can be risky because, in real-time, multiple scenarios can unfold, making it challenging to identify clear entry points or strategies. There isn’t a direct factor or fixed strategy for trading liquidity sweeps. However, if you have knowledge of Fair Value Gap (FVG), you can use it effectively to identify potential setups and trade liquidity sweeps more confidently.
I have already written articles on FVG, which will help you understand how to trade using FVG. If you’re interested, you can read those articles to gain clarity on the concept and its application in trading.
Before a liquidity sweep happens, it’s difficult to predict because it’s a market manipulation event. However, once it happens, whether it’s bullish or bearish, you need to identify the Fair Value Gap (FVG) in the opposite direction.
When an FVG forms in the opposite direction of the liquidity sweep and the price enters that gap, it creates an opportunity to initiate a trade. This is where understanding FVG becomes valuable, as it helps you spot potential reversals and enter trades with a higher probability of success.
By looking at this image, you can understand what I am trying to explain.
There is a difference between Change of Character and Liquidity sweep. In a liquidity sweep, the market breaks through support or resistance and then moves in the opposite direction. However, in Change of Character, after the price breaks out, it continues to move in the same direction.
So, this is everything you learned about liquidity sweep in this article—what liquidity sweep is and how to trade it. We’ve discussed it in detail. If you need any updates on this article, feel free to contact us. Also, if you need any guidance regarding trading, don’t hesitate to reach out.
Best of luck to all the new traders!
