What is liquidity in smart money concepts?

How to spot it

In ordinary market language, liquidity is how easily you can trade size without moving the price. SMC uses the word more narrowly, for the places on a chart where many orders are assumed to be waiting. The reasoning is simple. A trader who is short puts a protective stop above a recent high. That stop is an order to buy. A trader waiting for a breakout places a buy stop in the same spot. Add them up and the area just above an obvious high holds a pile of buy orders: buy-side liquidity.

Below an obvious low the same logic gives a pile of sell orders, from the stops of traders who are long and the entries of breakout sellers: sell-side liquidity. The naming trips people up. Buy-side liquidity is above price and sell-side is below, because the name describes the type of order resting there, not the direction a chart reader expects price to go next.

The more obvious the level, the more orders it is assumed to hold. A single swing high is a pool. Two or three highs at nearly the same price, called equal highs, are a bigger one, because every trader who sold any of those tests has a stop in the same narrow band. The high and low of a trading session are pools too, since they are visible to everyone watching that session.

Step by step

1. Mark the confirmed swing highs and swing lows.
2. Above each swing high, note buy-side liquidity. Below each swing low, note sell-side liquidity.
3. Look for highs or lows that line up within about 2 pips without price trading through the first one: these equal highs and equal lows are the largest pools.
4. Add the high and low of each completed session.
5. Cross off every pool that a later wick has already traded beyond. What remains is resting liquidity.

The pools SMC traders mark

• Swing highs and lows: the basic pool. One turning point, one cluster of stops beyond it.
• Equal highs and equal lows: two or more swings at almost the same price. Read as a magnet because the stops overlap.
• Session highs and lows: the extremes of the Asian, London or New York session. See kill zones and sessions.
• Old highs and lows: the previous day or week extreme. Fewer of them, watched by more people.
• Internal and external: pools inside the current range versus at its edges, covered in internal and external liquidity.

What traders do with the map

A liquidity map is used in three ways. As a target: the nearest untouched pool in the direction of the trend is where SMC traders expect price to head, an idea called the draw on liquidity. As a warning: an entry with a stop sitting in an obvious pool is exposed to a liquidity sweep. And as a trigger: a raid on a pool followed by a reversal is the first step of the entry model.

Worked example

The simulated chart below has several pools planted in it, some still resting and some already taken. Before you open the Lens, mark where you think stops are sitting: above each clear high, below each clear low, and especially where two highs or two lows line up.

The Lens draws a dashed line at each pool, in the accent colour for buy-side and the warm colour for sell-side, and stops the line at the candle that swept it. Compare your marks with it. The pools people miss most often are the equal highs or lows that are a pip or two apart rather than exact, and old pools that were already swept and no longer count as resting.

Reading the chart, step by step

1. The Lens marks 4 pools on this chart; 3 are still resting at the last candle.
2. Buy-side liquidity above a swing high at 0.65447 (candle 7). Nothing has traded through it yet.
3. Buy-side liquidity above equal highs at 0.65148 (candles 19, 31, 43, and 55). Nothing has traded through it yet.
4. Sell-side liquidity below equal lows at 0.64455 (candles 25, 37, and 49). Nothing has traded through it yet.
5. Sell-side liquidity below a swing low at 0.64514 was taken on candle 25: its wick reached 0.64455 and the candle closed beyond the level, a break.

These numbers come from the generated chart above. Change the seed and the prices change; the rule does not.

Takeaway: Liquidity, in the SMC sense, is a map of where stops are assumed to rest: beyond every swing, thickest where highs or lows line up, and gone once a wick has traded through.

Common mistakes

• Getting buy-side and sell-side backwards. Buy-side liquidity is above highs because the resting orders there are buy orders. Sell-side is below lows. It is not about which way you are trading.
• Marking pools that are already swept. Once a wick has traded beyond a level, the stops there have been triggered. Under this rule that pool is spent, and treating it as a fresh target is a common error.
• Demanding exact equal highs. Real equal highs are rarely identical to the pip. A later high that stops within a couple of pips short of the first one counts. One that trades through the first high does not: that is a sweep.
• Believing you can see the orders. A retail forex chart shows price, not the order book. Every pool on your chart is an inference about where stops probably are, however reasonable.