5 ways of identifying a liquidity pool

Or, 5 reasons why your stop loss is being placed wrongly

First things first: why do you need to know how to identify liquidity pools? Quick answer: to correctly place your stop losses and avoid stupid mistakes! Which are the most common mistakes beginner traders make?

Most Common Mistakes

Here are some reasons why beginner traders get stopped out:

Fighting against clear trends

Having no idea what they are doing (or gambling)

It is important to avoid being stopped out for dumb reasons, and that’s exactly the reason why it is important to identify liquidity pools.

What is a liquidity pool?

Liquidity pools are, basically, intersections of orders. These are the ranges where you will find a lot of long, short, take profit and stop losses orders and price will likely oscillate a lot around that area. They are usually close to big swing areas.

How to identify a liquidity pool

1 — It is visible also on higher time frames

2 — Equal highs/lows

3 — Extended consolidation ranges: people will open positions on both sides expecting a break out

4 — Daily and weekly highs/lows

5 — Stop logical areas

Placing your stop loss and take profit orders

Once you identify the liquidity pools, it becomes easier to place orders correctly and minimize the chances of being trapped or triggered on a bounce. Big investors look for these areas to fill their own big orders so your stop loss can match a buy (or sell) order in a big movement. If it happens, you were stopped out in a really bad moment.

Round numbers are likely to be liquidity pools…purely psychological =)

Place your orders slightly out of these ranges and avoid being caught with the crowd.