Lesson 3 of 650% Complete

Liquidity & Stop Hunts — Introduction 🌊

Intermediate14 min2025

Your stop loss isn't just protection—it's fuel for institutions. While you think you're placing stops for safety, banks see them as liquidity pools to harvest. Every obvious stop loss cluster is a magnet for price. This lesson reveals how smart money hunts your stops, sweeps liquidity, and why those brutal stop-outs followed by immediate reversals aren't bad luck. They're engineered.

Welcome to Lesson 3

You've learned price action. But here's the harsh truth most retail traders never discover:

Price doesn't move to find value. It moves to find liquidity.

The Professional Difference: Retail traders place stops at "obvious" levels (just below support, just above resistance). Professional traders place stops beyond where the stop hunt will go—typically 15-25 pips past obvious levels. They understand institutions NEED their stops to execute large orders, so they stay outside the kill zone.

Lesson Chapters

1Chapter 1: Liquidity - The Lifeblood

Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price.

The Institutional Problem

Retail Trader:

  • 1 Standard Lot (100,000 units)
  • Easy to fill instantly

Hedge Fund:

  • 500-1,000 Lots (50M-100M units)
  • Cannot fill instantly without moving price
  • Need massive counter-order volume

The Question: Where do institutions find enough counter-orders?

The Answer: They hunt liquidity pools—clusters of stop losses at obvious levels.

Pro Tip

Professional Insight: When Goldman Sachs wants to buy 100 million EUR/USD, they can't just hit "market buy." Instead, they identify where retail stops cluster (below support), engineer a move to sweep those stops, and use that forced selling as their entry liquidity.

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2Chapter 2: Where Liquidity Resides

Liquidity concentrates where clusters of pending orders and stop losses are placed.

The Two Types of External Liquidity

Buy Side Liquidity (BSL):

Location: Just above swing highs and resistance levels

Composition:

  • Buy Stop orders (traders buying on breakout)
  • Stop Loss orders from short sellers

What Happens When Swept:

  • Price spikes above resistance
  • Massive immediate buying pressure
  • Price often reverses after sweep

Sell Side Liquidity (SSL):

Location: Just below swing lows and support levels

Composition:

  • Sell Stop orders (traders selling on breakdown)
  • Stop Loss orders from long traders

What Happens When Swept:

  • Price spikes below support
  • Massive immediate selling pressure
  • Price often reverses after sweep

Visual Liquidity Map

Current Price: 1.0850

Buy Side Liquidity (Above):

  • Swing High: 1.0900 (BSL pool)
  • Round number: 1.1000 (Major BSL)

Sell Side Liquidity (Below):

  • Swing Low: 1.0800 (SSL pool)
  • Round number: 1.0700 (Major SSL)

Professional Understanding: Price will likely move to one of these levels to access liquidity before making its next directional move.

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Open a demo account to practice identifying Buy Side and Sell Side Liquidity on real charts

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3Chapter 3: Stop Hunts Defined

A Stop Hunt is a sharp movement specifically engineered to drive price to where stop loss orders cluster.

The Stop Hunt Mechanism

Institutions want to go LONG EUR/USD

Step 1: Identify Liquidity Pool

  • Support at 1.0800 (tested 3x)
  • SSL pool at 1.0795-1.0798 (retail stops)

Step 2: Engineer the Sweep

  • Sell aggressively
  • Price drops to 1.0794
  • Breaks below support briefly

Step 3: Trigger the Stops

  • All retail stops at 1.0795-1.0798 trigger
  • Massive selling volume enters market

Step 4: Absorb the Liquidity

  • Institution buys at 1.0794-1.0798
  • Uses forced selling as entry
  • Accumulates massive position

Step 5: The Reversal

  • Price spikes back above 1.0800
  • Closes at 1.0815 (strong bullish)
  • Retail stopped out, watching

Step 6: The True Move

  • Price rallies to 1.0950 (+135 pips)
  • Institution profits

The Visual Signature

On the chart, a stop hunt appears as:

  • Long wick beyond support/resistance
  • Strong body closes back inside range
  • Often a pin bar or engulfing pattern
  • Immediate reversal after spike

Learn to Identify Stop Hunt Patterns

Practice spotting stop hunts on demo charts. Learn to recognize the visual signature and trade with smart money

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4Chapter 4: Trading with the Hunt

The goal is to anticipate where stop hunts occur and avoid being liquidity.

Strategy 1: Avoid Obvious Stop Placement

Obvious Levels (Where Everyone Places Stops):

  • ❌ Just below swing low
  • ❌ Just above swing high
  • ❌ Exactly at round numbers
  • ❌ Just outside candlestick wicks

Professional Stop Placement:

  • ✅ 15-25 pips beyond obvious levels
  • ✅ Below/above the liquidity sweep zone
  • ✅ Using ATR-based buffers
  • ✅ Beyond multiple swing points

Example:

Amateur:

  • Support: 1.0800
  • SL: 1.0795 (5 pips below)
  • Gets hunted: Price spikes to 1.0794

Professional:

  • Support: 1.0800
  • Expected hunt: 1.0790-1.0795
  • SL: 1.0785 (15 pips below, beyond hunt)
  • Survives: Price spikes to 1.0794, SL safe

Strategy 2: Trade the Sweep

Entry Timing: After sweep completes and reversal confirmed

The Stop Hunt Pattern:

  1. Setup: Price approaching support/resistance
  2. Sweep: Quick spike beyond level
  3. Reversal: Strong close back inside range
  4. Confirmation: Next candle continues reversal

Long Entry (After SSL Sweep):

  • Price sweeps below support
  • Reverses with bullish candle
  • Entry: On candle close
  • SL: Below sweep low
  • TP: Next resistance

Practice Professional Stop Placement

Open a demo account to practice placing stops beyond liquidity zones and trading the sweep-reversal pattern

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5Chapter 5: Summary, FAQs & Quiz

Summary

Liquidity is the availability of counter-orders needed to execute trades. Liquidity concentrates where stop losses and pending orders cluster.

Stop Hunts are institutional maneuvers to drive price to liquidity pools to execute massive positions with optimal pricing.

Key Principles (0/3)

Liquidity Types
Buy Side Liquidity (BSL): Clusters above swing highs, Sell Side Liquidity (SSL): Clusters below swing lows
Stop Hunt Visual Signature
Long wick beyond level + strong reversal
Professional Strategy
Place stops 15-25 pips past obvious levels, Trade the reversal: Enter AFTER the sweep

Frequently Asked Questions

Q1: How can I tell if a break is a real breakout or a Stop Hunt?

Real Breakout:

  • Strong directional candle with large body
  • Decisive close well beyond level (20-50 pips)
  • Next candle continues breakout direction

Stop Hunt:

  • Quick wick beyond level (5-15 pips)
  • Candle closes back inside range
  • Long wick (rejection)
  • Immediate reversal

Professional Rule: Wait for candle close. Close decisively beyond = breakout. Close back inside with long wick = stop hunt.

Q2: Are stop hunts legal?

Stop hunts exist in a gray area. Technically legal because:

  • No single entity "controls" the market
  • Large players simply optimizing execution

Professional Perspective: Legal or not, stop hunts are REAL. Understanding and adapting to them is profitable.

Quiz

What is the primary purpose of a Stop Hunt for institutional traders?

Answer:

The purpose is to access liquidity pools to fill massive positions at optimal prices. Institutions hunt stops to trigger forced selling/buying, then use that as their entry liquidity. This minimizes slippage.

Where is Sell Side Liquidity (SSL) typically located?

Answer:

SSL is located just below key support levels where long position stop losses cluster. When retail goes long, they place stops just below support, creating a liquidity pool institutions target.

The professional method for dealing with Stop Hunts is to:

Answer:

Professionals avoid obvious stop placement and wait for sweep-and-reversal pattern. Place stops 15-25 pips beyond obvious levels. Wait for the sweep, then enter on reversal confirmation.

High liquidity in forex generally leads to:

Answer:

High liquidity leads to faster execution and less slippage. When many buyers and sellers are active, orders fill instantly at desired prices. Spreads are tight.

The visual signature of a completed stop hunt typically shows:

Answer:

A stop hunt shows a long wick beyond support/resistance followed by strong close back inside range. The wick is the sweep. The body closing back shows reversal after liquidity absorbed.

🚀 LeTechs Insight

You now see the market as a map of liquidity, not just random price movement. Understanding where liquidity pools form helps you avoid being the liquidity and trade with smart money instead.

Call to Action

Follow Smart Money Flow

Practice identifying liquidity pools on a demo account. Learn to spot Buy Side and Sell Side Liquidity, recognize stop hunt patterns, and place your stops beyond hunt zones. Trade with institutions, not against them.

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Proceed to Lesson 4: Support & Resistance — Basic Levels

Prerequisites

Before studying this lesson, ensure you've completed:

Ready to understand liquidity? Learning how institutions hunt stops helps you avoid being the liquidity and trade with smart money instead.

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Mark this lesson as complete to track your progress.

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