Lesson 1: Liquidity Sweeps and Stop Hunts

Introduction

Liquidity sweeps and stop hunts are hallmarks of institutional trading, designed to exploit retail traders’ predictable behaviors. Understanding these phenomena can help you identify optimal entry points and align your trades with institutional strategies.

In this lesson, you’ll learn what liquidity sweeps and stop hunts are, how to recognize them on a chart, and how to use them to your advantage.

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What Are Liquidity Sweeps?

A liquidity sweep occurs when price moves into areas of high liquidity to trigger stop-losses and pending orders.

• Purpose: To create liquidity for institutional orders.
• Result: Price often reverses after sweeping liquidity, leaving retail traders trapped.

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What Are Stop Hunts?

A stop hunt is a deliberate move to trigger stop-losses placed by retail traders near obvious support and resistance levels.

• Purpose: To generate liquidity for large institutional trades.

Example:

• Price dips below a key support level to trigger stop-losses before reversing sharply upward.

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How Institutions Use Liquidity Sweeps and Stop Hunts

1. To Enter Positions:
   • Push price into liquidity zones to execute large buy or sell orders.
2. To Exit Positions:
   • Trigger liquidity at key levels to offload positions without significant slippage.
3. To Manipulate Sentiment:
   • Create false breakouts or breakdowns to influence retail traders’ decisions.

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Characteristics of Liquidity Sweeps

1. Sharp Spikes in Price:
   • Sudden, aggressive moves into liquidity zones.
2. Large Wicks:
   • Candles with long wicks indicate liquidity grabs.
3. Volume Spikes:
   • Increased volume confirms institutional activity during sweeps.

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Where to Find Liquidity Zones

1. Support and Resistance Levels:
   • Key horizontal levels often attract stop-losses and pending orders.
2. Round Numbers:
   • Psychological levels like 1.1000 or 1.2000.
3. Consolidation Zones:
   • Areas of sideways price movement.

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How to Identify Liquidity Sweeps and Stop Hunts

1. Observe Price Action at Key Levels

• Look for sudden spikes followed by sharp reversals.

2. Monitor Volume

• Volume spikes often accompany liquidity sweeps.

3. Use Wicks as Confirmation

• Long wicks at key levels signal stop hunts or liquidity grabs.

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Practical Example: Liquidity Sweep at Resistance

Scenario:

1. Price approaches a resistance level at 1.2500.
2. A sudden spike takes price to 1.2550, triggering stop-losses above resistance.
3. Price reverses sharply to 1.2450.

Trade Opportunity:

• Enter short after the liquidity sweep, with a stop-loss above the wick high.

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How to Trade Liquidity Sweeps and Stop Hunts

1. Wait for Confirmation:
   • Avoid entering immediately after the sweep. Look for reversal patterns or candlestick confirmation.
2. Set Strategic Stop-Losses:
   • Place stops beyond liquidity zones to avoid being hunted.
3. Use Tight Risk Management:
   • Trade smaller positions until the reversal is confirmed.

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Common Mistakes in Trading Liquidity Sweeps

1. Entering Prematurely:
   • Jumping into trades before confirmation leads to false entries.
2. Ignoring Volume and Wicks:
   • Failing to analyze volume and price action reduces accuracy.
3. Overlooking Context:
   • Misinterpreting sweeps without considering broader market trends.

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Practical Task

1. Identify a liquidity sweep or stop hunt on a recent price chart.
2. Analyze the price behavior before, during, and after the sweep.
3. Reflect on how you could have traded the setup effectively.

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Reflection Questions

1. How do liquidity sweeps influence market behavior?
2. What tools or techniques will you use to confirm liquidity grabs?
3. How can understanding stop hunts improve your trade entries and exits?

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What’s Next?

In Lesson 2: Optimal Entry Points in Liquidity Zones, you’ll learn how to combine liquidity analysis with other tools to pinpoint high-probability trade entries.

Continue to Lesson 2 →