What the heck is Liquidity Hunting?
What is it and how can we take advantage of liquidity hunting
When you read the proper old-school trading books you realise nothing much has changed. People are still people. Fear, greed, and emotion drive decisions, we are not always rational. Traders from the 1930s were still trying to sit on their hands, not overtrade, and run winners…
Patterns are similar too.
- Trends existed.
- Range-bound markets were common.
- And so was liquidity hunting or stop hunting as it was often referred to.
Shaking The Tree
Market Makers would ‘shake the tree’ as we used to call it back when we had hybrid markets on the LSE via the SEAQ system.
During a strong intraday trend, market makers would intentionally widen the spread and try and push the price prints lower. Widening the spread frightens traders who bought at the top of a move, causing them to sell at the bid.
That in turn causes a trade print on the chart which triggers more selling. The market makers can move the share price lower to try and offset some of the short inventory they accumulated on the way up.
That was a liquidity hunt…
Locals in the pit
Locals would stop hunt in the trading pits, often driving prices to places they knew there would be resting stop orders.
Under lows, above highs, etc.
I write a blog article about how the number one local used to do that in the S&P pit here.
Get Smarter About Trading
Join 5,000+ traders who subscribe to our Traders Mastermind daily email. Designed to help you cultivate discipline, momentum and consistency in less than 3 minutes per day.
Think of the markets we trade on the screen. How many times does price probe through a key level before reversing?
These are all forms of liquidity hunting. The market tends to move towards areas of liquidity. Whether that’s pushed or natural price action is a discussion for another time…
So what does that mean for us?
Use it to your advantage.
You know price likes to taste these levels, and you know every trader who’s taken a free trading course (should I plug my Price Action Mastery here? Na…) likes to put a stop in the same damn level as everyone else.
So play the game.
- Consider initiating trades when everyone else is dumping
- Use the levels as price targets
- Don’t follow the crowd
- Think, where does price want to go here?
As Jesse Livermore said:
“The markets never change—the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes“
Now go hunt that liquidity…