Episode 3 Title: Why does it work “there”? The true nature of liquidity and stop-hunt【SMC Foundation③】
Hello,naohere.
Last time, we explained “Trends: continuations and reversals.” I feel my ability to distinguish trend continuation from reversals has been gradually improving.
The theme this time is “Liquidity” and “Stop Hunt.”
■What is Liquidity?Liquidity?
Liquidity, in short, is“the aggregate of orders accumulated in the market”.
In FX, there are price zones where many sell and buy orders are clustered. That is the place with high liquidity.
So, where do orders tend to accumulate?
The answer is “where everyone uses frequently.” Specifically, these include——
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Recent highs and lows with small fluctuations
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Upper and lower boundaries of ranges
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Round numbers（easy-to-read prices. e.g.:2000.00dollars,150.00yen, etc.)
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Previous day high/low
At these price ranges, many traders place orders such as “if we break here, cut losses” or “take profits here.”
■ FXMarket Reality——The Battle Among Big Players
Let me be a little precise here.
FXmarket share of trading volume is roughly as follows.
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Interbank (bank-to-bank): about40〜50%
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Institutional investors and hedge funds: about30〜40%
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Corporates (true demand): about10〜15%
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Small retail like us: about5〜6%
In other words, most of the market moves through“big players fighting each other”. Banks, hedge funds, and institutions clash based on their own agendas, and prices are formed as a result.Small retail are caught in that battle, to a large extent.
Why do big players target liquidity-rich areas——
Big players (institutions, banks, etc.) execute orders in the hundreds of billions to trillions of yen. If they place such enormous orders at once, they move the price themselves (slippage). Therefore“you need to be in a place where sufficient sell and buy orders already exist” to build a large position at favorable prices.
Where liquidity gathers——near highs/lows, round numbers, previous highs/lows——is a place where all market participants (big and small) can easily place orders. Big players move the price there to execute orders. As a result, small traders who also placed stops there get swept up too.
“Stop hunts sweep small players” is partly true, but more accurately“Big players fetch liquidity for their orders, and as a byproduct small players get caught up”.
■Do big players synchronize? ——Difference between “coordination” and “convergence”
You might wonder, “Do big players talk and move together?”
The answer isNo. Overt coordination (collusion) is illegal, and indeed2013〜2015
So why do big players sometimes appear to move in the same direction?——
It’s not coordination but“convergence” that occurs.
They look at the same economic indicators, analyze the same central-bank statements, and are aware of the same technical levels. Even among big players, since humans judge, they can independently reach similar conclusions. Not collusion, but as a result of rational decisions, a “majority” forms.
And the market tends to movein the direction that the majority of big players are facing.
There are times when trend-following funds collide with contrarian funds, and times when central banks intervene and crush one side with overwhelming power. The essence of higher-timeframe analysis is reading which side the big players are on, and tools like SMC market structure, OB, and FVG are there to trace those traces.
For us, small traders, the path isn’t to confront the big players head-on, but to“read the direction the majority is heading and ride the same boat”
■Stop Hunt Mechanism
Stop Hunt is“a price move to a liquidity-rich area (where stops cluster), then digestion of orders there, followed by a reversal”.
Here is the concrete flow.
①Many participants (big and small) have orders clustered near highs/lows
②Big players push the price to that level to execute orders (a spike)
③The clustered orders are all consumed at once (stops, take profits, new orders mixed)
④After orders complete, price moves in the opposite direction
⑤As a result“a quick breakout followed by an immediate reversal”emerges on the chart
“Why did it nudge past the high and then reverse sharply?”——That is the mechanism at work. In the battle of big orders, price moves, and small stops placed there get caught up as well.
GOLDoften shows“only the wick extends and then reverses”, which in many cases is this mechanism.
■Liquidity Grab (Sweep)
Expressing Stop Hunt in SMC terms is called “Liquidity Grab” or “Sweep.”
It means grabbing liquidity, briefly dipping above highs or below lows to take stops and then quickly turning back.
Chart-visible features:
・Long upper or lower wicks with a reversal candle
・Brief break of recent highs or lows, then quick return
・Subsequent strong move in the opposite direction
■How to actually use in trading
Understanding liquidity changes your chart-reading perspective.
“Prices don’t rise after slightly exceeding the high”→Possible Stop Hunt
“Prices don’t fall after slightly breaking the low”→Possible Stop Hunt
When this movement occurs, consider entry in the counter-trend direction.
However,rushing to enter just on a sweep is premature.In the next installments, by combining with Order Blocks (OB) and FVG, your accuracy improves greatly.
First, start by viewing the chart from the perspective that “price is drawn to high-liquidity areas.” When you see where you stand in the big players’ battle, you’ll be less likely to get caught up in it.
■ nao’s true feelings: I found SMCto besomething I learned later
To be honest.
I started trading with sweeps before I knew the word SMC.SMC.
“Nudge past the high/low briefly, reverse without chasing”——I learned this on my own, and it became a winning pattern. I even taught it to trading friends, but at the time there was no name for it, so explaining it was very hard.
The turning moment was a fellow trader’s remark: “nao, isn’t that a concept of SMC?”
Half-believing, I researched it, and what I was doing was exactlySMCOB”——The moment those names appeared, what I had felt only as a feeling became a language I could explain to others.
SoSMCfor me was not “learning a new method,” but rather “giving a name and rationale to what I was already doing.”
And at that moment I was certain that——entering only on a sweep is far less precise than entering after the foundation of OB andOB andFVG. That remains true today.
“Understanding liquidity ≠ targeting sweeps.”The correct use is to understand why moves happened in certain places.
■Summary: 3 Major Points for Today3.
①Liquidity is the aggregate of orders in the market. They tend to cluster around highs/lows and near round numbers.FXThe majority of market activity is among big players; small retail accounts for about〜
②The true nature of Stop Hunt (Liquidity Grab) is “big players moving price to liquidity-rich areas for executing orders.” Small stops get swept as a byproduct. The typical chart pattern is a long wick and quick reversal.
③With liquidity concept, you can read why moves occurred on the chart. Understanding the structure of big players’ battles helps you avoid being caught in the sweep.
Next time we will discuss “Order Block (OB).” The places where big players actually loaded positions — that is the Order Block. We will clearly explain how it differs from ordinary support and resistance.
Please check out the next edition as well!
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【Author Profile】
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nao｜FX-only trader for 16 years, EA developer
Specializes in GOLD scalping/day trading, centered on SMC/ICT.
During trading, I faced the problem of “even when reading correctly, the mental state wavers,” and
developed a hybrid tool for discretionary entry × EA automatic management called “tundere【R】.”
This helps eliminate fear of losses and maximizes profits during favorable moves, offered for gold traders.
▶ Details of tundere【R】 here
https://www.gogojungle.co.jp/tools/indicators/71019?via=toppage_recentViewed
