In SMC, liquidity means resting orders: buy and sell orders waiting at specific prices. The most important are stop-loss orders, because they turn into market orders the moment price reaches them. Where traders put their stops, liquidity gathers.
Buy-side liquidity (BSL)
Above a swing high sit buy orders: the stop-losses of traders who are short (a stop on a short position is a buy), and the buy-stop entries of breakout traders. Together these are buy-side liquidity.
Sell-side liquidity (SSL)
Below a swing low sit sell orders: the stop-losses of traders who are long, and the sell-stop entries of breakdown traders. Together these are sell-side liquidity.
Why large traders want it
A large trader who wants to sell needs buyers. Running price above a swing high triggers all the buy orders resting there, and the large trader sells into them. To buy big, they need sellers, which they find below swing lows. Liquidity is the fuel that lets big orders fill without moving price too far against them.
The draw on liquidity
SMC traders ask where price is likely to go next by asking where the nearest significant liquidity sits. That target is called the draw on liquidity. Price often takes liquidity on one side, then travels to take liquidity on the other.
| Buy-side liquidity | Sell-side liquidity | |
|---|---|---|
| Where | Above swing highs | Below swing lows |
| Whose orders | Short sellers' stops, breakout buyers | Long holders' stops, breakdown sellers |
| Becomes | Market buy orders when hit | Market sell orders when hit |
| Useful to | Large sellers | Large buyers |
Key takeaways
- Liquidity is resting orders, especially stop-losses that become market orders when hit.
- Buy-side liquidity rests above swing highs; sell-side liquidity rests below swing lows.
- Large traders use that liquidity to fill big orders, so price is often drawn toward it.
- The draw on liquidity is the next significant pool price is likely to reach.