Liquidity Hunting or Stop Hunting in Trading

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Liquidity Hunting or Stop Hunting in Trading

In this article, I am going to discuss What is Liquidity Hunting or Stop Hunting in Trading with Real-time Examples. Please read our previous article where we discussed Breaker Block Trading Strategy with Examples.

What is Liquidity Hunting or Stop Hunting in Trading?

Liquidity Hunting or Stop Hunting is when the price will move just above or below an area where retailer’s stop loss orders are placed. Executing those orders and reversing.

How do they do Liquidity hunting or Stop Hunting in Trading?

Let us discuss this with an example. Price in downtrend and retracement is going on. You SELL by seeing bearish engulfing after retracement in a downtrend because that is the logical thing to do. The location you sold at was the correct thing to do and if the price went down and you made money.

And then what happens is suddenly, the price moves up to the stop loss level and hits your stop loss, and takes you out of the trade. You think to yourself “Well, maybe I just made the wrong trade.”

And then what happens if the price goes down and after taking your stop loss? This means that all those stop orders and buy stops provided enough liquidity for the smart money to sell without incurring any slippage.

The objective of Liquidity hunting or Stop Hunting in Trading

Smart money before taking liquidity. They Build up Liquidity. Why are they doing this? They build their future Targets without any slippage and buy discounts and sell premiums.

Smart money only targets locations with higher Volumes pending and he collects them by inducing traders to buy/sell in the wrong direction and trap them and stop them. So the main objectives of Liquidity hunting or Stop Hunting are as follows:

1. Avoid Slippage due to big orders. Stop hunts are a crucial mechanism for Institutions to be able to conduct large transactions without “slippage.”
2. Buy low(discounts) sell high (premium)

Types of Liquidity Hunting or Stop Hunting in Trading

Smart money uses two mechanisms for liquidity collection

1. Inducement in the wrong direction
2. Stop hunting in the wrong location

Stop Hunting in the wrong location

This means after your stop hunting price moves in your original direction. Premature entry induces traders to take positions in the wrong location. Create panic by moving against your entry. Hit the stop Losses, grab the liquidity

Let us do an example. The natural thing to do is to SELL when you witness a double top after a pullback in a downward trend. The location where you sold was “correct,” the price dropped, and you made some money.

Suddenly, the price rallies to your stop loss level and hits your stop loss, and takes you out of the trade. You think to yourself “Well, maybe I just made the wrong trade”. And then what happens is the price goes down and after taking your stop loss. This means that all those stop orders and buy stops provided enough liquidity for the smart money to sell without incurring any slippage.

Let us do an example. In the below picture, the Price took bullish momentum before reaching the demand zone. The natural thing to do to buy the demand zone and sell at the supply zone. but the location where you sold was “incorrect,”. it creates FOMO ENTRY for early buyers. You buy and put a stop loss below the demand zone

The price fall to your stop loss level and hits your stop loss and takes you out of the trade. You think to yourself “Well, maybe I just made the wrong trade”. And then what happened is the price moved up after taking your stop loss. This means that all those stop orders and buy stops provided enough liquidity for the smart money to buy without incurring any extra slippage.

Inducement in the wrong direction

1. Induces traders to take positions in the wrong direction. Fomo Entry
2. Create panic by moving against her entry
3. Hit the stop Losses, grab the liquidity

Induce traders to take positions by providing evidence that the price is going to move in a certain direction. An inducement is a form of liquidity that is found near the Area of interest or supply-demand zones. Which is basically seen as a trap for retail traders.

Below is an example of an inducement

How do we know where the liquidity is in the chart?

Smart money only targets locations with higher Volumes pending and he collects them by inducing traders to buy/sell in the wrong direction and trap them and stop them. Once you can identify where volumes are, you have identified where the smart money trades from and you trade with them.

Liquidity-hunting locations are like

1. support and resistance, or supply demand zone or order block zone
2. the area on consolidation/accumulation
3. double top, double bottom and
4. Trendlines. Or chart pattern
5. Previous day high low
6. Session high low (The beginning of the day)
7. At the end of the day

These areas are mostly generating liquidity in the markets. We expect the price to be manipulated around these locations. Range /consolidation /any support resistance zone

• Range traders who have taken short positions at the top of the range will have a stop loss above the range. Therefore, the initial breakout will hit all stop-loss buy orders.
• The breakout movement will begin to induce traders to take long positions as breakout trading
• Induce to take long entry at the test of the flip support zone
• Once the price sustains beyond the flip zone again new long entry
• All of these entries become liquidity for smart money
• Once the require liquidly collected by smart money they reverse the direction

Double Top, Double Bottom

From the mindset of retailer’s trader. We buy the double bottom and sell the double top. Smart money is aware of this. They can see that stop-loss orders are building up there in large numbers. The primary responsibility of institutional traders is to sell the shares they currently hold. They want to buy low and sell high without any slippage.

Trendline and Pattern

Below is the bullish order block with trendline liquidity hunting

Session Liquidity in Trading

Let me see you first the volume curve of intraday trading

Session high and low act as lie liquidity because most of the traders stop loss orders above high or below low.

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In the next article, I am going to discuss Sniper Order Block Entry Trading Strategy. Here, in this article, I try to explain Liquidity Hunting and Stop Hunting in Trading with Real-time Examples. I hope you enjoy this Liquidity Hunting and Stop Hunting in the Trading article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts. Please watch the following video if you want to learn and understand this concept in a better way.