In smart money concepts, liquidity means orders resting at prices many traders can see, mostly stop losses and breakout entries. Price often travels to those prices. What it does when it gets there tells you whether it swept the orders and turned, or broke through and kept going.
What you will learn
- Where buy-side and sell-side liquidity sit on a chart
- Why equal highs and equal lows draw price towards them
- How to tell a sweep from a breakout using the close and the candles that follow
- Where to put your own stop, and what a wider stop does to your size
Buy-side and sell-side liquidity
Every stop loss is an order waiting to be triggered. A stop on a short trade is a buy order, and a stop on a long trade is a sell order. Breakout traders add to the pile with buy stops above highs and sell stops below lows.
- Buy-side liquidity sits above highs. It is made of short sellers' stops and breakout buy orders.
- Sell-side liquidity sits below lows. It is made of long traders' stops and breakout sell orders.
Say EUR/USD has a clear one-hour swing high at 1.0950. Traders who sold below it tend to put their stops a few pips above, from about 1.0952 to 1.0960, and breakout buyers set entries at much the same prices. You cannot see those orders on the chart, but you can work out where they are likely to be.
Look in the same places on every chart: swing highs and lows on your direction timeframe, equal highs and lows, the previous day's high and low, the range of the Asian session, and round numbers. Lesson 7 covers the session ranges.
Why would price go there? SMC teaching says large traders need the other side of their orders. A big buyer needs sellers, and a cluster of sell stops below a low supplies them. Nobody can see who triggered a given move, so treat this as an explanation for a pattern you can measure on the chart, and judge it by what price does.
Equal highs and equal lows
Equal highs are two or more highs within a few pips of each other. On a one-hour EUR/USD or GBP/USD chart, highs within 2 or 3 pips count. On a faster-moving symbol, widen that tolerance in line with its normal daily range.
Many traders read equal highs as a double top and put their stops just above them. Each test of the level gives more traders a reason to sell there with a stop a few pips higher. SMC traders read the same shape as a pool of buy-side liquidity and treat clean equal highs as a price target.
Take GBP/USD with one-hour highs at 1.2748 and 1.2750. Stops and breakout orders are likely to cluster from 1.2751 to around 1.2765. Lower down, equal lows at 1.2680 and 1.2682 hold the matching pool of sell-side liquidity.
Sweep or breakout: read the close
When price trades through equal highs, two things decide whether it is a sweep or a breakout: where the candle closes, and what the next few candles do.
A sweep usually runs in this order:
- A wick goes beyond the level and the candle closes back inside it.
- Within the next one to three candles, price moves away from the level.
- Internal structure breaks the other way, which is a change of character on a lower timeframe (lesson 2).
A breakout runs differently:
- A candle body closes beyond the level.
- The next pullback holds on or above the old level.
- Price makes a new high from there.
At the London open, a 15-minute GBP/USD candle spikes to 1.2763, 13 pips above the equal highs, and closes back at 1.2744. The next two candles fall, and one closes at 1.2728, below 1.2731, the last 15-minute low before the spike. That is a sweep, confirmed by the internal break.
A short trade from it could look like this:
- Sell at 1.2735 on a small pullback after the break.
- Put the stop 3 pips above the sweep high, at 1.2766. That is 31 pips.
- Aim for the sell-side liquidity at the equal lows, with the target just before it at 1.2685. That is 50 pips away, about 1.6 times the risk.
The same spike could have become a breakout. If the candle had closed at 1.2758, the next pullback had held at 1.2752 and a later candle had closed at 1.2771, the orders above 1.2750 would have carried price through, and the short idea would be gone.
Keep your own stop out of the cluster
A stop one pip beyond equal highs or lows is part of the liquidity you have just learned to spot. Put it beyond the price that would prove your idea wrong, with room for a sweep. In the example, that means above the sweep's high at 1.2763, well clear of the equal highs at 1.2750.
With a wider stop you trade a smaller size, and the dollar risk stays the same. On the first day of a $10,000 Direct account the daily loss limit is $400, and the floor is $9,400. At 0.5% risk you have $50 a trade, and one lot of GBP/USD is worth about $10 a pip.
- A 17-pip stop placed just above the equal highs, at 1.2752: 50 ÷ (17 × 10) = 0.294, rounded down to 0.29 lots, risking $49.30.
- The 31-pip stop above the sweep high: 50 ÷ (31 × 10) = 0.161, rounded down to 0.16 lots, risking $49.60.
The loss at the stop is almost identical, but an ordinary sweep reaches a 17-pip stop far more easily. Two tight stops swept in one morning cost $98.60, about a quarter of the $400 daily limit, and each time price went on to move the way you expected.
Check your understanding
One-hour EUR/USD highs sit at 1.0950 and 1.0952. Where is buy-side liquidity likely to be?
Just above 1.0952, roughly up to 1.0960. Traders who sold below the highs have their stops there, and breakout traders have their buy orders there.
A candle trades to 1.0961 and closes at 1.0947. The next candle closes at 1.0965. Sweep or breakout?
The first candle looked like a sweep, but the second closed beyond the level, so the sweep idea has failed. Treat it as a breakout until a pullback either holds above 1.0952 or closes back below it.
On a $10K Direct account at $50 risk, your stop moves from 17 pips to 31 pips. What happens to your size?
It falls from 0.29 to 0.16 lots. The loss at the stop stays at about $50.
Key points
- Buy-side liquidity sits above highs and sell-side liquidity sits below lows: stop losses plus breakout orders.
- It gathers at equal highs and lows, previous day highs and lows, session ranges, obvious swings and round numbers.
- A wick beyond a level that closes back inside, followed by an internal break the other way, is a sweep. A close beyond the level that holds on the pullback is a breakout.
- Put your stop beyond the likely sweep, clear of the obvious level, and cut your size so the dollar risk stays the same.
Next lesson: Mark the candle that launched a move and plan its retest
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