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LIQUIDITY ZONE

INTRODUCTION

In trading, a Liquidity Zone is a price area where significant buying or selling activity occurs, often
leading to strong reactions in the market. These zones represent areas where institutional traders,
market makers, and large players have placed their orders, creating pools of liquidity that price is
drawn toward.

Liquidity zones typically form around key support and resistance levels, previous highs and lows, or
areas where price has shown aggressive moves in the past. When the market approaches these
zones, traders anticipate either a strong bounce or a decisive break, depending on the overall trend
and sentiment.

Identifying liquidity zones helps traders understand where the "smart money" is active. These zones
often act as magnets for price action — pulling the market toward them — and then either absorbing
or rejecting further movement based on the volume of orders present.

A liquidity zone is best confirmed by observing long candle wicks, large-bodied candles, or multiple
rejections within a tight range. These characteristics show that both buyers and sellers are battling
for control, creating opportunities for well-timed entries and exits.

By focusing on liquidity zones, traders can improve their decision-making, avoid chasing false
breakouts, and align their trades with the deeper forces driving the market. It forms the backbone
for strategies based on supply and demand, price action, and smart money concepts.

In short, mastering liquidity zones allows traders to trade with the market's true momentum — not
against it.

A Liquidity Sweep occurs when the market deliberately moves into a liquidity zone to trigger stop-
losses, attract breakout traders, and collect pending orders — before reversing sharply. It’s a
common tactic used by large players (institutions, banks, smart money) to grab liquidity before taking
the market in the intended direction.

When price aggressively "sweeps" through a key level — such as previous highs, lows, or well-known
support and resistance — it forces weaker hands out of the market and absorbs their liquidity. This
creates the fuel needed for a powerful move.

Liquidity sweeps are often seen with sharp wick formations or sudden spikes that temporarily violate
key technical levels. To the untrained eye, these moves may seem like genuine breakouts or
breakdowns, but they are actually designed to trap retail traders and reset the order flow.

Smart traders watch for liquidity sweeps to position themselves with the big players, not against
them. Recognizing a sweep helps traders avoid false breakouts, improves entry timing, and allows
positioning with better risk-reward ratios.

In simple terms, a liquidity sweep is the market’s way of clearing the path before making its real
move. It's not manipulation — it's the natural behavior of a market seeking balance between buyers
and sellers at the most efficient price.

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Mastering liquidity sweeps gives traders an edge: instead of being hunted, they hunt with the smart
money.

Part I: The DAILY TIME

On the daily timeframe, liquidity is all about where big money — institutions, banks, funds — are
most interested in trading. These players don’t operate on small timeframes like 5M or 15M; they
operate where real money sits — daily highs, lows, major wicks, and unfilled gaps.

In daily context, liquidity zones are built slowly but hold deep meaning.
They reflect where stop-losses are stacked, where breakout traders are trapped, and where real
positioning happens.

When you see:

 Long wick rejections (buyers/sellers stepping in heavily)

 Tight consolidations (price building liquidity)

 Previous swing highs/lows (obvious targets for liquidity sweeps)

 Big body candles followed by indecision (imbalance being corrected)

...that’s where liquidity is gathering or being cleared.

Daily timeframe liquidity is not random — it’s shaped over days or weeks and requires larger
movements to be activated.

Key Concepts a Trader Should Take from Daily Liquidity Context

1. Price is drawn to liquidity.

➔ Markets are always moving toward the next pool of available liquidity.
➔ If price is trending up, it will aim for daily highs or untested zones.
➔ If trending down, it will hunt daily lows or liquidity pockets.

2. Liquidity sweeps create opportunities, not panic.

➔ A sweep above/below daily levels is often a trap.
➔ Smart traders wait for the sweep to happen — then trade the real move (the reversal or
breakout after the sweep).

3. Daily timeframe controls the narrative.

➔ If you trade intraday (e.g., scalping, quick moves), always respect the daily context.
➔ A strong daily liquidity zone can completely overpower small timeframe signals.

4. Patience is your weapon.

➔ Daily liquidity setups are slower, but they offer bigger and more reliable moves.
➔ Wait for liquidity zones to be tested, swept, or respected before committing your capital.

5. Entry can still be fine-tuned.

➔ Identify liquidity on the daily, but execute entries on smaller timeframes (like 15M or 1H)
once price reacts.

6. In short:

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 7. Daily liquidity shows where the real money is positioned.
The key is to think: "Where would big players hunt liquidity next?"
And then patiently wait for price to react around those zones before you take
your shot.
THE DO’S AND DON’T

✅ DO's for Trading with Daily Liquidity Context

 Always mark major daily highs, lows, and strong wick points.
➔ These are magnets for price and act as liquidity targets.
 Wait for confirmation after a liquidity sweep.
➔ Don’t jump on the sweep itself — wait for price action (e.g., bullish/bearish
confirmation candles, rejection, engulfing patterns).
 Combine liquidity context with momentum indicators.
➔ Tools like ADX, RSI, or EMA reactions will help confirm if the move is strong or
fake.
 Think like an institutional player.
➔ Ask yourself:
"If I was managing a billion dollars, where would I need liquidity to fill my orders?"
 Respect the daily timeframe as your guide.
➔ Even if you execute on smaller timeframes (M15, H1), daily context rules over all.
 Stay patient and emotionally detached.
➔ Daily setups take time to form. Premature entries before liquidity is properly swept
often lead to losses.

❌ DON'Ts for Trading with Daily Liquidity Context

 Don’t chase price during a sweep.
➔ Sweeps are designed to trap impatient traders. If you enter during the fake
breakout, you’re the liquidity.
 Don’t ignore failed sweeps.
➔ If price sweeps and then fails to reverse, it’s a strong sign of real breakout strength.
Adapt quickly.
 Don’t overtrade around liquidity zones.
➔ More setups near liquidity zones doesn’t mean you take every micro move. Focus
on quality confirmations.
 Don’t rely only on indicators without reading the candles.
➔ Indicators support your view, but price action tells the truth.
 Don’t expect clean respect every time.
➔ Sometimes, price will chop around a liquidity zone before committing. Give it
space to develop.
 Don’t set tight stops too close to liquidity zones.
➔ Big players intentionally push price slightly beyond key levels to trigger stops.
Protect your stops from getting swept.

Final Mindset:

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 In liquidity trading, you are either the hunter or the hunted.
Patience, observation, and understanding the daily context will put you on the
hunter’s side.
PART II: 7 TYPES OF LIQUIDITY ZONES

1. Fibonacci Zones

The zones based on Fibonacci levels can concentrate the market liquidity.

Classic Fibonacci retracement levels: 0,382; 0,5; 0,618; 0.786

and Fibonacci Extension levels: 1,272; 1,414; 1,618 attract market participants
and the liquidity.

Above, you can see an example of a liquidity zone based on 0,618 retracement
level.
The reaction of the price to that Fib.level clearly indicate the concentration of
liquidity around that.

Also, there are specific areas on a price chart where Fibonacci levels of different
impulse legs will match.
Such zones will be called Fibonacci confluence zones.

Fibonacci confluence zones will be more significant Fibonacci based liquidity

zones.

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 Above, is the example of a confluence zone that is based on 0,618 and 0,5
retracement levels of 2 impulses.

The underlined area is a perfect example of a significant liquidity zone that serves
as the magnet for the price.

2. Psychological Zones

Psychological zones, based on psychological price levels and round numbers,

quite often concentrate the market liquidity.

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Look at a psychological level on WTI Crude Oil. 80.0 level composes a significant liquidity zones that
proved its significance by multiple tests and strong bullish and bearish reactions to that.

3. Volume Based Zones

The analysis of market volumes with different technical indicators can show the liquidity zones
where high trading volumes concentrate.

One of such indicators is Volume Profile.

On the right side, Volume Profile indicate the concentration of trading volumes on different price
levels.
Volume spikes will show us the liquidity zones.

4. Historic Zones

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Historic liquidity zones will be the areas on a price chart based on historically significant price levels.

Market participants pay close attention to the price levels that were respected by the market in the
past. For that reason, such levels attract the market liquidity.

Above is the example of an important rising trend line on GBPJPY pair.

Because of its historical significance, it will attract the market liquidity.

Trend lined based liquidity zone will be also called a floating liquidity area because it moves with
time.

6. Technical Indicators Based Zones

Popular technical indicators may attract the market liquidity.

For example, universally applied Moving Average can concentrate huge trading volumes.

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In the example above, a floating area around a commonly applied Simple Moving Average with 50
length, acts as a significant liquidity zone on EURJPY.

7. Confluence Zones

Confluence zones are the liquidity zones based on a confluence of liquidity zones of different types.

For example, a match between historic zones, Fibonacci zones and volume based zones.

Such liquidity zones are considered to be the most significant.

SUMMARY

Understanding Liquidity Zones in Forex

Liquidity zones form in the market where there is a high concentration of orders. These orders could
be stop-losses, pending buys, or sells. Most retail traders unknowingly place orders in these zones.
Institutional trading desks then step in and use these zones to their advantage.

For example, if EUR/USD keeps bouncing around 1.0800, a lot of buy orders may sit just below that
level. Banks can push price just beneath that level to trigger stop-losses and collect liquidity. That’s
why price often reverses quickly after a breakout fails.

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Key Characteristics of Liquidity Zones

 They are usually near previous highs or lows.

 Often coincide with support and resistance levels.

 Found near round numbers like 1.1000 or 0.8500.

 Filled with stop orders from retail traders.

 Commonly align with visible order blocks.

Liquidity zones are not random. They form because of trader psychology. Retail traders place their
stops in predictable places. Big banks know that and hunt those levels to get filled. This is where stop
hunts come into play.

PART III: Daily Candle for setup entry direction and liquidity context.

1. Daily Candle as Setup Entry Direction

👉 The Daily Candle shows the real daily battle between buyers and sellers.

Key things to check on Daily:

 Big Body = Strong Intent:

o Big bullish candle → buyers controlled the day.

o Big bearish candle → sellers controlled the day.

 Small Body = Indecision (Doji or Inside Bar):

o No clear side won → wait or prepare for a breakout trap/liquidity grab.

 Wick Analysis:

o Long upper wick = sellers rejected higher prices.

o Long lower wick = buyers rejected lower prices.

✅ You can use today's daily candle to predict tomorrow's bias:

Example: Big bullish candle with small upper wick = bullish continuation is more likely next day.
Example: Big bearish candle with long bottom wick = possible fake breakdown and bullish reversal
next day.

Daily Candle Shows What You Do

Big bullish body Look for buys next day

Big bearish body Look for sells next day

Long upper wick Sell setups (after liquidity sweep)

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Daily Candle Shows What You Do

Long lower wick Buy setups (after liquidity sweep)

Tiny body (Doji) Stay patient, wait for breakouts or traps

Daily Candle Setup vs H4 Candle Setup

Aspect Daily H4

Smaller story inside the bigger

Power Stronger, bigger story, high-timeframe control
story

Sets the direction for entire sessions (Asian,

Impact Sets direction for part of the day
London, NY)

Entry Style Swing Trading or Large Intraday Bias Precision Intraday Trading

Liquidity Local liquidity grabs (session

Higher level liquidity grabs (major stops)
Context stops)

Patience
High (few candles per week) Medium (6 candles per day)
Needed

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