In Inner Circle Trader (ICT) concepts, liquidity plays a central role in understanding how the market moves and how institutional traders, or “Smart Money,” operate.
Two critical phenomena in ICT that revolve around liquidity are Liquidity Sweeps and Liquidity Runs.
These strategies help traders identify key market movements and exploit institutional actions for their advantage.
Let’s dive deep into what liquidity sweeps and liquidity runs mean, how they work, and how you can use them in your trading strategy with practical examples.
1. What is Liquidity in ICT?
Before understanding liquidity sweeps and liquidity runs, it’s essential to grasp the concept of liquidity in trading.
- Liquidity refers to the availability of orders in the market, specifically stop orders (buy stops and sell stops) that rest above or below key levels like swing highs and lows, consolidation ranges, or other significant price zones.
- These stop orders are targets for institutional traders, who need to fill large positions and require the liquidity provided by these stops to enter or exit the market without significant slippage.
2. Liquidity Sweep in ICT
A Liquidity Sweep occurs when the market moves beyond a key level of liquidity, such as a recent swing high or low, triggering stop-loss orders or enticing retail traders into entering a trade based on a perceived breakout.
However, instead of continuing in the breakout direction, the market quickly reverses after sweeping the liquidity, trapping traders and allowing institutional players to execute their trades.
1. How Does a Liquidity Sweep Happen in ICT?
- Step 1: The market approaches a key swing high or low where retail traders have placed their stop-loss orders (liquidity).
- Step 2: Institutional traders push the price beyond that level to trigger the stop-losses or attract breakout traders into the market.
- Step 3: After collecting the liquidity, the price reverses quickly, often moving in the opposite direction, leaving retail traders trapped.
This sweep of liquidity allows institutions to fill their large positions before the price moves in the desired direction.
3. Example of a Liquidity Sweep in ICT
Imagine the EUR/USD pair is trading in a range between 1.1800 and 1.1850.
Retail traders might see the 1.1850 level as resistance and place stop-loss orders just above that level, at 1.1855, expecting a breakout or protecting short positions.
1. Liquidity Pool:
The area above 1.1850 is a pool of buy-stop orders (liquidity).
2. Liquidity Sweep:
Institutions push the price to 1.1860, triggering the buy stops, creating a brief spike.
3. Reversal:
After collecting liquidity, the price reverses and falls back below 1.1850, trapping retail traders who expected a breakout.
The liquidity sweep provides the institutions with the liquidity they need to sell their positions, and the reversal marks the real direction of the market.
4. Liquidity Run in ICT
A Liquidity Run happens when the market aggressively targets liquidity by running through multiple liquidity pools consecutively.
This move is typically initiated by institutions and Smart Money to clear out orders at significant levels, driving the price rapidly in one direction.
1. How Does a Liquidity Run Happen?
- Step 1: The market begins to move toward a series of liquidity pools, such as consecutive swing highs or lows.
- Step 2: As the price clears these liquidity levels, it accelerates, collecting stop-loss orders or triggering entries for retail traders.
- Step 3: The liquidity run often leads to an impulsive move, continuing in the same direction until all the liquidity is cleared.
Liquidity runs often happen during news releases or periods of high volatility, where institutional traders seek to gather as much liquidity as possible in a short period.
5. Example of a Liquidity Run in ICT
Consider the GBP/USD pair during a major news event. The price is moving towards a key resistance area at 1.3500, where multiple swing highs have formed over time.
Retail traders have placed stop-losses just above each of these swing highs.
- Step 1: Institutions push the price higher, breaking through each swing high and collecting buy stops (liquidity pools).
- Step 2: As more buy stops are triggered, the price accelerates, creating a sharp bullish move known as the Liquidity Run.
- Step 3: The market runs through all the liquidity pools in the area, eventually reaching a major resistance level or order block, where institutions may decide to reverse the price.
6. Why Liquidity Sweeps and Runs Matter in ICT
Both Liquidity Sweeps and Liquidity Runs are critical concepts in ICT because they reveal how institutions manipulate the market to gather liquidity.
Understanding these concepts can help traders avoid common retail traps, like entering trades at breakouts or placing stops at obvious levels.
For ICT traders, the key takeaway is that the market often targets areas of high liquidity before making a significant move in the opposite direction (in the case of a sweep) or continuing in the same direction (in the case of a run).
7. How to Use Liquidity Sweeps and Runs in ICT Trading
1. Identifying Liquidity Pools:
The first step is to identify key areas where liquidity is likely resting, such as swing highs, swing lows, order blocks, or consolidation ranges.
These are areas where retail traders are likely placing stop-losses.
2. Wait for the Sweep:
Once you’ve identified a liquidity pool, watch for a potential liquidity sweep.
When the price moves beyond the key level and quickly reverses, this is your signal that institutions have gathered the liquidity they need.
3. Enter After Confirmation:
Instead of entering on the breakout, wait for price action confirmation, such as a rejection candle or a reversal pattern, to enter in the direction opposite the sweep.
4. Target Liquidity Runs:
If the market continues moving aggressively after clearing a liquidity level, this may indicate a liquidity run.
In this case, consider entering in the direction of the run, targeting the next liquidity pool or a major support/resistance level.
8. Example of Combining Liquidity Sweep and Liquidity Run in ICT
Let’s say you are trading the USD/JPY pair.
The market has been consolidating between 110.00 and 110.50 for several days, with retail traders placing stop-loss orders above 110.50 and below 110.00.
1. Liquidity Sweep:
The price breaks below 110.00, triggering sell stops and creating a brief liquidity sweep.
2. Reversal:
After sweeping the liquidity, the price quickly reverses back into the range, signaling that institutions have collected liquidity for long positions.
3. Liquidity Run:
After the reversal, the price pushes higher, breaking through 110.50 and targeting the next liquidity pool at 111.00, creating a bullish liquidity run.
In this scenario, you can enter a buy trade after the liquidity sweep below 110.00 and ride the liquidity run toward 111.00, profiting from both the sweep and the run.
9. Conclusion
Liquidity Sweeps and Liquidity Runs are essential tools for understanding how institutional traders gather liquidity and manipulate the market.
By identifying key liquidity pools and waiting for sweeps or runs, ICT traders can align themselves with institutional moves and avoid common retail traps.
Key takeaways:
- Liquidity Sweeps: Price briefly moves beyond key levels to gather stop-loss orders before reversing.
- Liquidity Runs: Price aggressively targets consecutive liquidity pools, accelerating in one direction.
- ICT Strategy: Use liquidity sweeps to enter trades in the opposite direction of retail traders and capitalize on liquidity runs for aggressive moves in the same direction.
Mastering these concepts can significantly improve your ability to time the market and trade in harmony with institutional players.
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