Liquidity Sweep In Forex
What is a Liquidity Sweep?
A Liquidity Sweep is a market movement where price moves sharply to capture pending orders (stop-losses, take-profits, or limit orders) before reversing.
Think of it as the market “hunting” liquidity before resuming its main trend.
Liquidity in trading refers to all the buy and sell orders resting in the market.
The market tends to target these zones because large participants (banks, institutions) need liquidity to enter or exit positions.
So a Liquidity Sweep is essentially price triggering stops or grabbing orders before moving back in the direction of the bigger trend.
Whenever a trend starts, some traders will definitely miss out on the start perharps because they were away from their computer at the time or whatever reason. When these traders come back and realize the bus has left without them, they place pending orders near the begining of the trend. These pending orders will be displayed in the "Depth of Market" window (MetaTrader and cTrader have this feature) and when other traders see them, they start trading in the direction of the pending order forcing price to reverse and return to the begining of the trend to pick those orders before continuing. Unfortunately, mant stop losses would have already been placed near the begining of the trend and these stops will be triggered when price returns. This could be what makes it look like stop loss hunting but it is just experienced traders placing their entry where you placed your stop. In the image I attached, the downward trend started only for price to return to the origin before continuing in the downward trend.
