How to Trade Liquidity Sweeps (Beginner's Guide) transcript

Imagine this. Price breaks above a resistance level. You immediately buy because you think the breakout is real. But just a few minutes later, price completely reverses. Now you're asking yourself, if the market wanted to reverse, why did it break above the resistance first? Well, the answer is liquidity. And in today's video, I'm going to teach you exactly what liquidity is, where liquidity forms, why price moves towards it, and by the end of this lesson, you'll start seeing the market from a completely different perspective.

So, let's get started. The first thing you need to understand is that liquidity is simply a pool of orders. That's all liquidity is. For the market to move, there have to be orders. Every buyer needs a seller and every seller needs a buyer. Without orders, nothing happens. So, whenever you hear someone talking about liquidity, they're simply referring to areas where lots of buy or sell orders are waiting in the market.

Now, here's the important question. Where do these orders come from? Well, they come from traders. Let's see how. Imagine price creates a swing high. The moment that swing high forms, different traders begin placing different kinds of orders around that level. Some traders are waiting to buy if price breaks above that high. Some traders who sold earlier place their stop losses above that high. Others already have pending buy stop orders sitting there.

Without even realizing it, thousands of traders begin placing orders around the exact same area. That creates buyside liquidity. Now the exact same thing happens below a swing low. If traders bought from this area, most of them will place their stop loss below the low. Some traders are waiting to sell if the low breaks. Again, a lot of orders begin gathering in one place. That creates sellside liquidity. Now, let's go to the chart.

I want you to look at this swing high. Don't focus on the candles just yet. Instead, ask yourself, if I was looking to take this trade, where would I place my stop-loss? Where would breakout traders buy? Where would pending buy orders be sitting? You'll notice that almost all of them are [clears throat] above this high. That's liquidity. Now, look at this swing low. Ask yourself the same question. Where would buyers place their stop losses?

Where would breakout sellers enter? Exactly below the low. That's another liquidity pool. Now, here's something that completely changed the way I looked at the market. Most beginners think price moves because of candlestick patterns. Professional traders don't think like that. They ask one simple question. Where are the orders? Because price doesn't just move randomly. Price moves toward areas where there are orders waiting.

That's why you'll constantly see price traveling from one liquidity pool to another. Not because the market is trying to trick you, but because that's where the orders are. Let's look at another chart. Notice this major swing high. Price is getting closer and closer to it. Now ask yourself, what is sitting above this high? Liquidity. Now watch what price does. Price trades above the high, takes those orders, and then reacts.

That movement isn't random. Price came there because that's where the liquidity was. Now, this brings us to something called a liquidity sweep. A liquidity sweep simply happens when price moves above a swing high or below a swing low, takes the liquidity resting at that level, and then sharply reverses. That sharp rejection tells us that after taking the available liquidity, price was no longer accepted at those levels.

Now, here's something I want you to understand. Not every move above a swing high or below a swing low is a liquidity sweep. Sometimes price simply breaks above a high and continues trending higher. That's just a breakout. Likewise, sometimes price breaks below a low and continues moving lower. Again, that's just [clears throat] a breakout. For me, I only classify it as a liquidity sweep when price takes the liquidity and then sharply reverses.

Let's compare two examples on the chart. In this first example, price trades above the previous high and then sharply reverses. This is what I would classify as a liquidity sweep. Now look at this second example. Price also trades above the previous high, but instead of reversing, it [clears throat] continues moving higher. This isn't a liquidity sweep. It's simply a breakout that continued in the direction of the trend.

Understanding this one difference will stop you from confusing every breakout with a liquidity sweep. Now, at this point, you're probably wondering, "How do I actually tell the difference?" Because remember, both of them can trade above a swing high or below a swing low. So, how do we know which one we're looking at? Well, there are three confirmations I personally look for. The first confirmation is the candle formation.

If price trades above a previous high or below a previous low and immediately starts printing strong rejection candles, that's usually a good indication that we're looking at a liquidity sweep. Those rejection candles tell us that price attempted to trade beyond that level but was quickly rejected. On the other hand, if price breaks the level, prints strong bullish candles above a high or strong bearish candles below a low, that's more likely to be a breakout.

So, always pay attention to how price reacts after taking the liquidity. The second confirmation is how price approaches the liquidity. This is something a lot of traders overlook. Ask yourself, did price move towards that high or that low impulsively or correctively? If price is aggressively pushing towards a previous high with strong bullish momentum, then the probability of price simply breaking through that high is generally much higher.

On the other hand, if price slowly and correctively works its way back towards that high, the probability of it sweeping the liquidity and then reversing becomes much higher. The third confirmation is higher time frame context. This is probably my favorite confirmation. Let's say we have a swing low and just below that swing low, we have a higher time frame point of interest. Now ask yourself, what is price more likely trying to do?

There's a good chance price wants to sweep that low, tap into the higher time frame point of interest, and then reverse from that area. This is why I never look at liquidity in isolation. I always ask myself, is there a higher time frame reason for price to reverse from this area? If the answer is yes, then the probability of that liquidity sweep working becomes much higher. Now that you understand the whole concept around liquidity, let me show you one simple way to trade liquidity sweeps.

This is a very simple beginnerfriendly strategy and it only requires one time frame. So here's how it works. Go to your chart and identify your previous swing highs and your previous swing lows. Then simply wait for price to take out either one of those levels. Now, here's where it gets interesting. When price sweeps that swing high or that swing low, you only want price to leave behind a wick. In other words, you do not want to see the candle body close beyond the swing point.

It doesn't matter if price leaves one wick or even multiple wicks. As long as there's no body close beyond that liquidity level, you're good to go. Now, there's one more thing, and this is very important. You want price to approach that swing point correctively, not impulsively. As we discussed earlier, a corrective move into liquidity generally gives a higher probability of a successful liquidity sweep. Once all those conditions are met, the next thing to wait for is an engulfing candle.

Once that engulfing candle forms, that's your confirmation to enter the trade. Place your stop loss at the swing point that was swept and then target either the opposing liquidity or a 1:2 riskto-reward ratio. It's a very simple strategy, but when you combine it with everything we've covered so far, it can be a very effective way to trade liquidity sweeps. Now, enough with the theory. Let's go to the charts and I'll show you several real examples of this setup playing out in live market conditions.

So, let's go through our first example. The first thing we need to do is identify our obvious swing points. Then we'll simply wait for price to come back and react at one of those levels. In this example, we have two obvious swing highs. The first one is this swing high right here. And the second one is this swing high just here. Now, all we need to do is play price forward and see what happens. As you can see, price starts pushing higher and eventually sweeps the first swing high.

Notice something very important here. Price only leaves behind a wick. It doesn't close above the swing high. That's exactly what we want to see. But there's something else I want you to pay attention to. Look at how correctively price moved into this liquidity. It wasn't an aggressive impulsive move. Instead, price gradually worked its way back into the swing high. Remember, that's one of the confirmations we talked about earlier.

Now, after sweeping the liquidity, price leaves behind only a wick and then gives us a bearish engulfing candle. At this point, we have everything we're looking for. The liquidity has been swept. The candle didn't close above the swing high. Price approached the level correctively, and we've now received our engulfing candle. That's our confirmation to enter the trade. The stop loss goes just above at the swing high and we'll target a 1:2 riskto-reward ratio.

Now let's play price forward and see how the trade plays out. As you can see price starts moving in our favor almost immediately. There is a small pullback but eventually price reaches our 1 to2 take-profit target. Now here's something interesting. If we had decided to hold the trade longer, price actually continued much lower, reaching almost a 1 to 3.5 riskto-reward ratio. This is one of the reasons I really like trading liquidity sweeps.

Once the liquidity has been taken, the market often moves away from that level with strong momentum. Of course, that doesn't happen every single time, which is why taking profits at 1 to two is still a solid and consistent approach. Now, let's move on to the next example. This is a bullish example and also our final example for this video. Now, I think you can already see that price swept this swing low and left behind only wicks.

That's already a very good sign, but we still don't have our engulfing candle. So, at this point, we don't want to enter the trade just yet. There's something else I want you to notice. Look at how price approached this liquidity. Instead of moving into it correctively, price actually left behind a bearish fair value gap. So before we take this trade, we first want to see price disrespect that fair value gap before giving us an engulfing candle.

So let's play price forward and see what happens next. And that's exactly what price does. Price trades back above the inverse fair value gap, showing that sellers are beginning to lose control and then gives us our bullish engulfing candle. At this point, we now have all the confirmation we need. The liquidity has been swept. Price only left behind a wick. The bearish fair value gap has been disrespected. And we now have our engulfing candle.

That's our confirmation to enter the trade. The stop loss goes just below the swept swing low and we'll target a 1:2 riskto-reward ratio. Now, let's play price forward and see how the trade plays out. As you can see, price doesn't waste any time. It rallies straight into our 1:2 take-profit target. But let's take it one step further. Let's extend our target to a 1:3 riskto-reward ratio and see what happens. Here you can see price pulls back to our entry but eventually continues higher and reaches the 1:3 target as well.

This shows that depending on the market conditions, you can choose to target a 1:2 or even a 1:3 riskto-reward ratio. And that's the basic idea behind this strategy. As you've seen throughout this video, liquidity isn't as complicated as many traders make it seem. Once you understand where liquidity forms, why price moves towards it, how to identify a liquidity sweep, and how to wait for proper confirmation, you already have a solid foundation for trading this concept.

Of course, there's still a lot more to learn about liquidity, and we'll cover more advanced concepts in future videos, but for now, I hope this lesson has given you a clear understanding of the basics and shown you how to start applying liquidity sweeps in your own trading. If you found this video helpful, don't forget to leave a like, subscribe to the channel, and I'll see you in the next