Simple Guide to Spotting And Trading Liquidity Grabs - Traders Mastermind (2024)

The financial markets are like the battle between David vs. Goliath.

David represents the ordinary traders, while Goliath signifies the institutional traders with the monetary muscle to cause notable price moves.

Whether it’s the forex market or indices, trading can often bemanipulative.

This is where liquidity grabs come into play…

Whether you believe in manipulation or not, grasping this concept can probably improve any trading strategy and make you a better trader overall.

Table of Contents

Before getting into what a liquidity grab is, let’s first define what liquidity is.

Liquidityrefers to the ease of trading financial markets without drastically affecting prices. The number of market participants (or the volume) determines how liquid a traded asset is.

The more people involved, the more liquid it is.

High liquidity means lower volatility, stable price movements, and lower trading costs. Low liquidity is the opposite.

It fosters high volatility, erratic price moves, and higher trading costs.

A liquidity grab refers to a strategic and swift exploitation of stop loss orders by ‘big players,’ which causes a sudden surge of reversal.

Stop-loss orders represent where liquidity will have accumulated the most in specific areas.

It’s a basic concept of liquidity. For every buyer, there must be a seller, and vice versa.

It’s commonly believed that the markets consist of retail traders (or ‘dumb money’) and institutional traders (or ‘smart money’).

This group can enter the markets at random price levels. Yet, this would result in an unfavourable entry and a sudden price movement.

A workaround is for the smart money to break a large order into chunks around similar points

The liquidity grab happens best with stop loss orders are clustered at certain price levels.

Stops are orders where both buying and selling occur at the same time.

For instance, if you are ‘stopped out’ of a buy position, you are technically selling to a buyer in the market at that point.

Here’s an example to demonstrate this.

Suppose you took a long trade on the EUR/NZD currency pair at 1.75900, with a stop loss at 1.75300.

Your order will, of course, result in a loss for you if the price reaches the latter level. But, you would be selling your position for a buyer who enters at this point.

If there is an abundance of these stops, the smart money is said to trigger these orders, causing traders to liquidate their losing trade.

We also refer to this as ‘stop loss hunting.’

In doing so, the ‘big boys’ have ‘grabbed’ high liquidity or volume.

Given their large orders, a sudden surge typically occurs.

Analysts commonly associate liquidity grabs with the forex market since it’s the most traded or liquid asset globally. Yet, this concept applies to many other financial markets.

A liquidity grab occurs in several ways. However, trying to watch where such a grab could happen is more art than science.

This is especially true with the decentralised forex market, where we have no information on order flow data and volume.

Although you could get away with aliquidity grab indicator, it’s better to use discretion and understand the inner workings of price movement.

Swing highs and swing lows

Basic swing highs and lows are the most prominent areas where traders place stop orders. The idea is that any trend will go through higher highs, higher lows, or lower lows and lower highs.

A break of this structure would signal an invalidation point, making it a sensible point to place a stop.

Of course, it doesn’t always work like this, which is where you can expect spikes and manipulation. This goes for other areas on a chart.

Support and resistance

The second common liquidity grab location is at key support and resistance levels (orsupply and demand zones).

It’s quite easy to understand why, as support and resistance pretty much runs any traded market.

Yet, only the obvious key ones matter for stop losses. You should search these on higher time frames.

There aren’t specific guidelines on what makes a key support/resistance level.

The best way is to look for an area where a big move has emerged more than once from the same spot.

Some traders believe the more times the market has hit a level, the stronger it is. So, they place their stop loss orders there.

Psychological numbers

An extension of support and resistance is psychological numbers.

These are levels where the price ends with a round number. Prices ending with three or more zeros make for a good psychological zone.

The idea is that traders or people generally base their trades at rounded-off levels for mathematical convenience.

It also means such price levels are references for placing stops. Yet, again, so-called smart traders take advantage of them… like the

Knowing where liquidity grabs happen is the first step to anticipating them.

Needless to say, there isn’t a definite way to know beforehand.

Still, a common trait of a liquidity grab is the price action. Any sharp movement is often a result of a specific price pattern where a candle has a small body and a long tail or wick.

Or, it could be an engulfing formation where one or a few candles are noticeably bigger than others.

Our first example is on the daily chart of the EUR/GBP forex trading pair using simple trend lines.

We explained earlier how a basic trend works.

This currency pair respected a downtrend’s typical lower low, lower high price movement until it reached the ellipse marked ‘1.’

It’s clear that traders had the stops here. Some would have assumed the trend was over. Yet, sellers entered aggressively judging by the bearish candles, resulting in a trend continuation.

The same happens at the ellipse marked ‘2.’ The price broke the trend line.

But after a few days, it continued to trend lower. The pin bar here could have given a decent signal (as stated earlier with the long tail and small body).

Another thing to note is the key support/resistance zone, a common location to see these candles.

The next example (the best one) is on the 4HR chart on Ethereum.

We have a psychological level at the $1800 price, which happens to be a demand zone.

The ellipses highlight the stop loss hunting that happened several times around this area, judging by the candles with the long wicks.

As stated earlier, it’s believed that smart traders build their positions in chunks around similar price levels.

We see this as Ethereum hit the $1800 price many times for a few months before the sharp movement to the upside.

The last example takes us to good ol’ silver (XAG/USD) on the weekly chart.

Straight off the bat, we see wicks on the $28.000 supply area (also a psychological number).

You’ll know something fishy went on when you observe such candles!

It’s a classic case of the ‘big boys’ hunting for liquidity where buyers believed the market would break the high.

Eventually, many sellers joined the party, driving XAG/USD down, as noted from the arrow.

Alltrading strategiescan benefit from exploiting liquidity grabs like the major market participants.

Ultimately, a traded financial market will experience such movements as traders seek to make the most profit with the least risk.

While you may take advantage of liquidity grabs, it also means defending yourself from them.

The key thing here is yourstop loss strategy.

This is why sometimes you could consider using wider stops, especially in high volatility conditions. Of course, traders should also find less obvious areas than the ones mentioned for their stops.

Liquidity grabs may be an advanced topic for some. Still, with enough exposure, it becomes second nature and something necessary to make informed decisions as a trader.

Discover moretrading strategies like:

• Opening Range Breakout
• VWAP Trading Stratgeies
• Mean Reversion Strategies

Don’t forget that a strategy is only as good as the trader executing it!

Sotrading psychologyis an important topic to work on.

Keeping a trading journalis also a good way to keep learning from your mistakes.

Similarly atrading plan, keeps you on the correct heading.

Good trading!