Episode 3 Title: Why does it work “there”? The true nature of liquidity and stop-hunt【SMC Foundation③】

Hello,naohere.

Last time we explainedBOSandCHoCH

This time's theme is “Liquidity” and “Stop Hunt.”

Understanding this will answer questions like “Why did it suddenly move against me?” and “Why was my stop taken?” What looked like an “irrational move” on the chart will actually become visible as a result of rational actions by market participants.

What is Liquidity?

Liquidity, in short, is“the aggregate of orders accumulated in the market”.

In FX, there are price ranges where many sell orders and buy orders cluster. Those arethe places with high liquidity.“High-liquidity areas”.

So where do orders tend to cluster?

The answer is “where everyone uses often.” Specifically——

・ Recent highs and lows with small deviations

・ Upper and lower boundaries of ranges

・ Round numbers（e.g.,: 2000.00 dollars, 150.00 yen, etc.）

・ Previous day’s high and low

In these price zones, many traders place orders like “if this breaks, cut losses” or “take profits here.”

Reality of the FX Market — The Battle Among the Big Players

Here’s a more precise discussion.

FXmarket shares are roughly as follows.

・ Interbank (bank-to-bank transactions): about40〜50%

・ Institutional investors and hedge funds: about30〜40%

・ Corporates (real demand): about10〜15%

・ Retail traders like us: about2.5%(BIS April 2025 survey)

In other words, the majority of the market moves because of“battles among the big players”. Banks, hedge funds, and institutional investors clash with their own agendas, and prices form as a result.Small retail traders are swept up in that battle

So why do big players target high-liquidity locations?——

Big players (institutions and banks) execute orders in the hundreds of billions to trillions of yen. Placing such large orders at once would move the price themselves (slippage). Therefore,“a place with sufficient buy and sell orders clustered” is necessary to build large positions at favorable prices.

Places where liquidity gathers——near highs/lows, round numbers, previous day highs/lows——are places where all market participants (big and small) can place orders. Big players push the price there to execute orders. As a result, small traders who had placed stops there get swept up too.

“Stop-hunting causing small traders to be taken” is technically true in one sense, but more accurately“Big players moving liquidity for their own order execution causes small traders to be swept in as a byproduct”.

Do big players synchronize? Difference between “cooperation” and “convergence”

You might wonder, “Do big players talk to coordinate their moves?”

The answer isNo. Overt cooperation (collusion) is prohibited by law, and in fact2013〜2015, major banks like Barclays and JP Morgan Chase were charged with FX rate manipulation and paid fines in the hundreds of billions of yen.

Then why do big players sometimes appear to move in the same direction?——

It’s because not cooperation but“convergence”“convergence”

They are looking at the same economic indicators, analyzing the same central bank statements, and focusing on the same technical levels. Even among big players, humans make judgments, so independent conclusions can converge. Not collusion, but“the majority forms as a result of rational judgments”.

And the trend is typically“the majority-big players move in the direction they are leaning toward”.

There are times when trend-following funds and mean-reversion funds clash, or central banks intervene with overwhelming force to push one side down. The essence of top-level analysis is reading“which big player is the majority now”, and tools likeSMCOBFVG are tools to track those traces.

What we small traders can do is not to directly challenge the big players, but“read the direction the majority is leaning toward and ride on the same boat”.