Stop Hunts and Liquidity: How Buy and Sell Stops Drive Price Moves

The market creates this short-term high and this short-term low.

What rests above that short-term high? If you've taken notes and been paying attention, it's buy stop.

What's resting below this low here? Sell stops.

The market trades down initially and takes out the sell stops.

Why would it do that first? This is inducing shorts, okay?

So it engineers liquidity. Even if the idea is that they wanna take the market down to this level, if it's been consolidating, I like to see them do this type of move here, where it drops down first.

It's kinda like a sucker play. Anybody that has a sell stop below here, they wanna sell on weakness, they're gonna get tricked into the marketplace.

So now they're triggered in short, and then they start doing a run against those traders and against those that were already short from this high.

So what are they doing? The market's being driven higher, and the algorithm's gonna attack that buy stop liquidity pool.

Why would they wanna do that? Number one, it's gonna punish those individuals here that went short.

When it drives a go- above this high here, it sends all those buy stops into market orders, flooding the marketplace.

That gives a huge influx of willing buyers at a high price, which is the perfect counterparty to smart money that wants to sell at a high price.

So when it drives up to here, those buy stops are the counterparty or the other side of a smart money trader that's wanting to go short.

Because they're gonna sell short, they gotta sell it to somebody that wants to buy at a high price.

That's why the market does this. Anytime a significant price move lower is expected, always anticipate some measure of a stop hunt on buy stops or a short-term high being taken out.

Obviously, it's reversed when you're looking for higher prices.

Generally, you'll see a short-term low taken out and sell stops taken before you see a very pronounced rally higher