Liquidity Sweeps Explained: How to Identify and Trade Them

A liquidity sweep is a trading concept used by price action traders (also known as SMC or ICT traders). A liquidity sweep occurs when large institutions or market participants execute large orders, triggering pending buy or sell orders at levels of liquidity. This article explains liquidity, how to identify liquidity sweeps, how to trade liquidity sweeps, and the difference between a liquidity sweep and a liquidity grab.

What is Liquidity in Trading

There are two types of liquidity in the market: Buyside Liquidity (BSL) and Sellside Liquidity (SSL). BSL refers to the levels on the chart where short sellers have their stop losses set, while SSL refers to the levels where traders who are long have their stop losses set. These levels are typically found at highs/lows of ranges and are seen as areas where traders exit losing positions. This guide explains how to identify and trade buyside liquidity and sellside liquidity.

What is a Liquidity Sweep

A liquidity sweep is a market phenomenon where significant players, such as institutional traders, deliberately drive prices through key levels to trigger clusters of pending buy or sell orders. These key levels, typically at buyside liquidity and sellside liquidity, are areas where retail traders commonly place stop losses for their positions. The goal of a liquidity sweep is to create the necessary liquidity for these large market participants to enter or exit positions with minimal slippage. Once these pending orders are triggered, the market often reverses direction, creating rapid price movements.

How to Identify a Liquidity Sweep

In order to identify a liquidity sweep, mark out buyside liquidity and sellside liquidity levels on your chart. Then, observe how price reacts around these levels. If price goes below or above your level and shoots back up or down, this is considered a liquidity sweep. If there is a liquidity sweep at sellside liquidity, you should have a long bias and look for long trade opportunities. If there is a liquidity sweep at buyside liquidity, you should have a short bias and look for short trade opportunities.

Buyside Liquidity Sweep

In this example, buyside liquidity is the key level to watch. Price shoots above this level, consolidates, and comes back down below the level. This is considered a sweep of liquidity and you should now have a bearish bias in the market or look for short trade opportunities.

Sellside Liquidity Sweep

In this example, sellside liquidity is the key level to watch. Price goes below this level, consolidates, and comes back up above the level. This is considered a sweep of liquidity and you should now have a bullish bias in the market or look for long trade opportunities.

How to Trade Liquidity Sweeps

Liquidity sweeps should not be solely used as a buy or sell indication in trading. Instead, they should be used as a piece of confluence or confirmation in your trading strategy. As mentioned above, liquidity sweeps can set a market bias such as bullish or bearish. Once you’ve established your bias, you can look to execute trades at key levels such as Fair Value Gaps (FVG) or Order Blocks (OB).

Long Trade Example

In this example, there is a sweep of sellside liquidity meaning we should look for long trade opportunities. Shortly after, price jumps up and forms a bullish fair value gap. This FVG can be used as our key level for a point of entry. Once price retraces to the FVG, take a long entry, setting your stop loss below the liquidity level and taking a 1:2 risk-to-reward trade.

Short Trade Example

Liquidity Sweeps vs. Liquidity Grabs

Liquidity sweeps and liquidity grabs are very similar, but they have different price movement characteristics. With a liquidity sweep, price goes above or below a level of liquidity and then comes back up. Price can consolidate above or below the level for a while though and it will still be considered a liquidity sweep once it trades back above or below the liquidity level.

However, liquidity grabs occur in just one candle stick. A candle will go above or below the liquidity level and quickly shoot back up. This type of candle will have a large wick and a small body, similar to the ‘Dragonfly Doji’ or ‘Gravestone Doji’ candle. For bullish liquidity grabs, or grabs at sellside liquidity, the large wick indicates a lot of buyers stepped into the market. For bearish liquidity grabs, or grabs at buyside liquidity, the long wick indicates a lot of sellers stepped into the market.