Why price so often pokes through an obvious level and reverses right after taking out your stop. Here is where liquidity builds up and how to turn a stop hunt from a loss into an entry.
Clusters of orders that can be filled: stops, pending orders, liquidations.
Where to look
Above equal highs, below equal lows, at round numbers and obvious levels.
Liquidity sweep
Price runs beyond a level, triggers the stops and comes back.
The main risk
A stop right beyond an obvious level is the first candidate to be swept.
What liquidity is
To buy a large size you need someone to sell. To sell, someone to buy. Liquidity is those opposing orders. Most of them sit where the crowd puts its stops: a stop on a long is a market sell, a stop on a short is a market buy.
The crowd places stops predictably: just below a low, just above a high, beyond a round number. That's why these places become magnets for price.
Where liquidity builds up
Equal highs and lows. Two or three touches of the same level — a "perfect" support or resistance with lots of stops behind it.
Obvious levels. Yesterday's high and low, range edges.
Trendlines. Buyers' stops pile up under an uptrend line.
When price reaches a cluster of stops, they fire all at once. If there's no real intent to keep going, price reverses: a big participant got their size, and the breakout turned out to be false.
Several equal highs, a poke up that takes the stops — and a reversal down. Illustrative data.
How to use it
01
Mark the liquidity pools
Equal extremes, obvious levels on your working timeframe.
02
Don't put your stop in the same place
A stop right beyond an obvious level with a minimal margin gets taken first.
03
Wait for the poke and return
Price ran beyond the level and closed back — a false breakout signal.
04
Look for confirmation
A volume spike on the poke, a long wick, a break of minor structure the other way.
05
Stop beyond the poke's extreme
If price runs beyond the level again, the scenario failed.
Liquidity is fuel for a move. Stops taken below a low power a rally; stops taken above a high power a decline. That's why the best reversals often start with a false breakout.
Common mistakes
Putting the stop right beyond the level
It's the most obvious spot. Place it behind structure with a margin, or reduce the position size.
Calling every poke a sweep
If price holds beyond the level, it's a breakout, not a sweep.
Entering during the poke itself
Without the return beyond the level you're catching a falling knife.
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