Your stop loss isn't just protection—it's fuel for institutions. While you think you're placing stops for safety, banks see them as liquidity pools to harvest. Every obvious stop loss cluster is a magnet for price. This lesson reveals how smart money hunts your stops, sweeps liquidity, and why those brutal stop-outs followed by immediate reversals aren't bad luck. They're engineered.
Welcome to Lesson 3
You've learned price action. But here's the harsh truth most retail traders never discover:
Price doesn't move to find value. It moves to find liquidity.
The Professional Difference: Retail traders place stops at "obvious" levels (just below support, just above resistance). Professional traders place stops beyond where the stop hunt will go—typically 15-25 pips past obvious levels. They understand institutions NEED their stops to execute large orders, so they stay outside the kill zone.
Lesson Chapters
1Chapter 1: Liquidity - The Lifeblood⏱️ ~3 min
Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price.
The Institutional Problem
Retail Trader:
- 1 Standard Lot (100,000 units)
- Easy to fill instantly
Hedge Fund:
- 500-1,000 Lots (50M-100M units)
- Cannot fill instantly without moving price
- Need massive counter-order volume
The Question: Where do institutions find enough counter-orders?
The Answer: They hunt liquidity pools—clusters of stop losses at obvious levels.
Professional Insight: When Goldman Sachs wants to buy 100 million EUR/USD, they can't just hit "market buy." Instead, they identify where retail stops cluster (below support), engineer a move to sweep those stops, and use that forced selling as their entry liquidity.
2Chapter 2: Where Liquidity Resides⏱️ ~3 min
Liquidity concentrates where clusters of pending orders and stop losses are placed.
The Two Types of External Liquidity
Buy Side Liquidity (BSL):
Location: Just above swing highs and resistance levels
Composition:
- Buy Stop orders (traders buying on breakout)
- Stop Loss orders from short sellers
What Happens When Swept:
- Price spikes above resistance
- Massive immediate buying pressure
- Price often reverses after sweep
Sell Side Liquidity (SSL):
Location: Just below swing lows and support levels
Composition:
- Sell Stop orders (traders selling on breakdown)
- Stop Loss orders from long traders
What Happens When Swept:
- Price spikes below support
- Massive immediate selling pressure
- Price often reverses after sweep
Visual Liquidity Map
Current Price: 1.0850
Buy Side Liquidity (Above):
- Swing High: 1.0900 (BSL pool)
- Round number: 1.1000 (Major BSL)
Sell Side Liquidity (Below):
- Swing Low: 1.0800 (SSL pool)
- Round number: 1.0700 (Major SSL)
Professional Understanding: Price will likely move to one of these levels to access liquidity before making its next directional move.
3Chapter 3: Stop Hunts Defined⏱️ ~4 min
A Stop Hunt is a sharp movement specifically engineered to drive price to where stop loss orders cluster.
The Stop Hunt Mechanism
Institutions want to go LONG EUR/USD
Step 1: Identify Liquidity Pool
- Support at 1.0800 (tested 3x)
- SSL pool at 1.0795-1.0798 (retail stops)
Step 2: Engineer the Sweep
- Sell aggressively
- Price drops to 1.0794
- Breaks below support briefly
Step 3: Trigger the Stops
- All retail stops at 1.0795-1.0798 trigger
- Massive selling volume enters market
Step 4: Absorb the Liquidity
- Institution buys at 1.0794-1.0798
- Uses forced selling as entry
- Accumulates massive position
Step 5: The Reversal
- Price spikes back above 1.0800
- Closes at 1.0815 (strong bullish)
- Retail stopped out, watching
Step 6: The True Move
- Price rallies to 1.0950 (+135 pips)
- Institution profits
The Visual Signature
On the chart, a stop hunt appears as:
- Long wick beyond support/resistance
- Strong body closes back inside range
- Often a pin bar or engulfing pattern
- Immediate reversal after spike
4Chapter 4: Trading with the Hunt⏱️ ~3 min
The goal is to anticipate where stop hunts occur and avoid being liquidity.
Strategy 1: Avoid Obvious Stop Placement
Obvious Levels (Where Everyone Places Stops):
- ❌ Just below swing low
- ❌ Just above swing high
- ❌ Exactly at round numbers
- ❌ Just outside candlestick wicks
Professional Stop Placement:
- ✅ 15-25 pips beyond obvious levels
- ✅ Below/above the liquidity sweep zone
- ✅ Using ATR-based buffers
- ✅ Beyond multiple swing points
Example:
Amateur:
- Support: 1.0800
- SL: 1.0795 (5 pips below)
- Gets hunted: Price spikes to 1.0794
Professional:
- Support: 1.0800
- Expected hunt: 1.0790-1.0795
- SL: 1.0785 (15 pips below, beyond hunt)
- Survives: Price spikes to 1.0794, SL safe
Strategy 2: Trade the Sweep
Entry Timing: After sweep completes and reversal confirmed
The Stop Hunt Pattern:
- Setup: Price approaching support/resistance
- Sweep: Quick spike beyond level
- Reversal: Strong close back inside range
- Confirmation: Next candle continues reversal
Long Entry (After SSL Sweep):
- Price sweeps below support
- Reverses with bullish candle
- Entry: On candle close
- SL: Below sweep low
- TP: Next resistance
5Chapter 5: Summary, FAQs & Quiz⏱️ ~4 min
Summary
Liquidity is the availability of counter-orders needed to execute trades. Liquidity concentrates where stop losses and pending orders cluster.
Stop Hunts are institutional maneuvers to drive price to liquidity pools to execute massive positions with optimal pricing.
Key Principles (0/3)
Frequently Asked Questions
Q1: How can I tell if a break is a real breakout or a Stop Hunt?
Real Breakout:
- Strong directional candle with large body
- Decisive close well beyond level (20-50 pips)
- Next candle continues breakout direction
Stop Hunt:
- Quick wick beyond level (5-15 pips)
- Candle closes back inside range
- Long wick (rejection)
- Immediate reversal
Professional Rule: Wait for candle close. Close decisively beyond = breakout. Close back inside with long wick = stop hunt.
Q2: Are stop hunts legal?
Stop hunts exist in a gray area. Technically legal because:
- No single entity "controls" the market
- Large players simply optimizing execution
Professional Perspective: Legal or not, stop hunts are REAL. Understanding and adapting to them is profitable.
Quiz
What is the primary purpose of a Stop Hunt for institutional traders?
Where is Sell Side Liquidity (SSL) typically located?
The professional method for dealing with Stop Hunts is to:
High liquidity in forex generally leads to:
The visual signature of a completed stop hunt typically shows:
Call to Action
You now see the market as a map of liquidity, not just random price movement.
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Practice identifying liquidity pools on a demo account. Learn to spot Buy Side and Sell Side Liquidity, recognize stop hunt patterns, and place your stops beyond hunt zones. Trade with institutions, not against them.
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Proceed to Lesson 4: Support & Resistance — Basic Levels
Prerequisites
Before studying this lesson, ensure you've completed:
Ready to understand liquidity? Learning how institutions hunt stops helps you avoid being the liquidity and trade with smart money instead.
Ready to continue?
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