What is a Liquidity Grab?
A liquidity grab (also called wick hunting or stop hunting) is when smart money deliberately creates a sharp price spike above resistance or below support to trigger retail stop loss orders. After collecting this liquidity, price quickly reverses in the original direction. This is one of the most recognizable patterns in institutional trading.
Why Smart Money Hunts Liquidity
Institutional traders hunt stops because:
- Retail traders place stops at obvious psychological levels
- When many small stops are triggered, it creates volume and execution liquidity
- Smart money needs this liquidity to enter large positions
- It allows them to accumulate at better prices than available in normal trading
How to Identify Liquidity Grabs
Liquidity grabs have specific characteristics:
- Sharp spike (wick) that extends beyond key resistance/support levels
- The wick closes back inside the trading range quickly (often same candle)
- High volume during the wick formation
- The move feels "unnatural" or sudden compared to normal price action
- Often followed by strong directional movement in the opposite direction of the spike
Trading Liquidity Grabs
The key is entering AFTER the liquidity grab, when smart money starts their move in the original direction. Never trade the wick itself – wait for confirmation. Entry rules:
- Identify the liquidity grab (wick above resistance or below support)
- Wait for price to close back inside the range
- Confirm the breakout direction (usually opposite the wick)
- Enter with a stop above/below the wick depending on direction
- Target the next order block or swing level
Stop Placement Strategy
This is critical – most retail traders place stops at obvious levels where liquidity is hunted. Smart traders use:
- Stops BEYOND the wick extremes (add 20-30 pips buffer)
- Stops beyond psychological levels (not exactly at round numbers)
- Stops further away but with smaller position size for better risk/reward
- Mental stops instead of hard stops in volatile market conditions
Real-World Liquidity Grab Example
GBP/USD hits resistance at 1.2750 where many traders place sell stops. Smart money creates a sharp spike to 1.2780 (creating a wick) to trigger these stops. Once the stops are filled, price quickly reverses back below 1.2750 and continues lower. The trader who waited for confirmation after the wick got a clean entry point with far better risk management than those whose stops were hunted.
Combining Liquidity Grabs With Order Blocks
The most powerful setups combine liquidity grabs with previous order blocks. When a liquidity grab occurs AT a previous order block, it's an extremely high-probability setup because:
- Smart money is likely entering at this zone
- The wick helps eliminate weak traders' stops
- Multiple factors confirm the trade direction
- Risk/reward ratios are typically excellent
FAQ
A: No. A liquidity grab requires the price to reverse quickly after the wick. Not all wicks are liquidity grabs; some are just normal volatility.
A: Place stops beyond obvious levels, use wider stops with smaller position sizes, and consider using mental stops instead of hard stops in choppy markets.