Liquidity Grab – UPDATED 2023 – Understanding Forex Liquidity Zones

One of the first advantages of getting started with forex trading is the liquidity the market offers.

This liquidity offers ease of trade, making the market popular among traders. 

Small and big players tend to acquire larger positions in the market than they can afford, in an attempt to benefit from the leverage.

This is where the concept of liquidity grab comes into play. 

Let us try to understand what is liquidity grab, liquidity zones in the Forex market, and the liquidity grab strategy. 

Liquidity Grab – A Complete Guide

Liquidity in the Forex market refers to the ability to find a counterpart to a trade.

For example, if you want to buy a currency pair at a price, you need somebody in the market willing to sell it at the price.

Big trades and institutional investors who need to fill big orders must find liquidity areas in the market to complete their trade. 

Stops are often considered to be critical for survival in a leveraged market.

A trader who does not include stops in his strategy will eventually face a condition of forced liquidation.

A majority of market participants are considered to be speculators who don’t enjoy the luxury of holding on to a losing trade for too long as their positions are leveraged

Big and small traders often use stop and stop-loss orders to lock in their profits automatically.

Stop hunting is a common practice in the Forex market and involves forcing market participants to leave their positions by driving the price to a level where traders have set up their stop-loss orders. 

When too many stop losses are triggered at the same time, a high volatility scenario is created where some investors can find unique opportunities.

Such a practice is called liquidity grab which we discuss further in this guide. 

what is liquidity sweep in forex?

In forex trading, a liquidity sweep refers to the process of filling an order by taking advantage of all available liquidity at multiple price levels within the market.

When a trader places an order, the order is typically filled at the best available price at that moment. However, in fast-moving markets or during times of low liquidity, it may be beneficial for the trader to use a liquidity sweep to ensure their order is filled at the best possible price.

To achieve a liquidity sweep, the trader’s order is broken up into smaller sub-orders and spread across multiple price levels in the market. By doing so, the trader can take advantage of all available liquidity, potentially achieving a better average price for their entire order.

Liquidity sweeps are typically used by institutional traders and high-frequency trading firms that require large volumes of trades to be executed quickly and efficiently.

Forex Grab - Understanding Forex Liquidity Zones

Understanding Forex Liquidity Zones

When big players take their positions, they certainly aim for the best prices.

However, looking at the size of their positions, it is a challenge to find sufficient counter-forces to fill the orders.

If such a trader enters the market at a low liquidity area, the volatility it creates impacts the average price negatively.

Lower liquidity generally results in a more volatile market, bringing drastic changes in the prices. 

On the other hand, if that trader enters the trade at an area of higher liquidity, it results in a less volatile market where prices don’t change so drastically, ensuring a better average price for the position.

These are the zones where stop-loss orders are placed.

The concept of ‘liquidity grab’ comes from the need for big players to enter the market in liquidity zones as they look to take large positions.

Such zones always attract trader attention because liquidity exists in those pockets. 

The Forex liquidity zones are created from an initial imbalance of supply and demand forming swing lows and swing highs.

As more and more players take their positions, these zones are what traders use as a reference to place stops. When these levels are retested, a decision is made.

The result is either a reversal to the mean or breakout of the level. 

Liquidity Grab In Forex – What You Should Know?

The concept of liquidity grab in Forex is quite straightforward.

Any major currency pair generally moves in a defined trading zone with support and resistance levels.

Stop hunting is a trading action where the price and volume action threatens to trigger stops on either side of support and resistance.

When a large number of stops are triggered, the price experiences higher volatility on more orders hitting the market. 

Such volatility in price generates opportunities for participants to enter a trade in a favourable environment or protect their position.

The fact that too many stop losses triggered at once result in sharp moves in the price action is the reason behind the practice of liquidity grab.

Some traders benefit from volatility in price as it brings potential trading opportunities. 

While many think stop hunting is a negative practice, it is a legitimate form of trading.

It is simply an act of throwing away losing players out of the market.

They are referred to as ‘weak shorts’ and ‘weak longs’ in the language of Forex.

Large speculators like investment banks and institutional investors use this practice of creating momentum; it is so common that anybody unaware of such dynamics can suffer from potential losses. 

Liquidity Grab Strategy

Liquidity zones are levels where the liquidity makes a decision frequently because a large number of orders hit the market.

Such an intersection of orders is useful in decisions like starting new trades, managing open trades, and modifying stop losses.

One of the first things to do is to avoid placing stops too close to the market so that you are not stopped out too frequently.

Moreover, it is common for traders to use swing lows and highs to place stops and reversal orders.

Another thing to note is that trends are your friends only until the end, so play the trends and don’t fight them. 

An ideal strategy is to remain on high alert of a low-quality liquidity zone.

This is because rejection has higher chances of holding on to a retest when it is rigorous.

There are several other factors like market conditions, confluence, economic data, market structure in higher timeframes, etc. that help decide whether the zone will hold or fold.

It is important to account for these factors in your trading strategy. 

Another aspect you should be aware of when planning your liquidity grab strategy is factoring in the time.

When it takes a considerable number of days or weeks to see the separation between liquidity zone creation and first retest, it is easy to assume that the zone does not hold the weight as it did as the orders are pulled.

On the contrary, if two or more liquidity zones are found near each other, participants are likely to place their stop orders at the extreme level. 

Final Thoughts

Liquidity grab is an important trading practice in the Forex market, often used by big players looking to enter or exit a large position.

Depending on your strategy and goals, you can use it to spot opportunities in the market and minimize risks.

We hope this guide helps you understand how you can create a strategy that leverages liquidity zones and liquidity grab. 

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About the author

Seasoned forex trader John Henry teaches new traders key concepts like divergence, mean reversion, and price action for free, sharing over a decade of market experience and analysis expertise in a clear, practical style.