SPOT LIQUIDITY GRABS WITH SUPPORT & RESISTANCE INDICATOR

By MUHAMMAD SAMIULLAH February 11, 2024

Ever experienced that moment in the Forex market when the price suddenly surges,
knocking out your stop-loss, only to reverse course just as quickly? If so, you’ve likely
been caught in what’s known as a liquidity grab.

Liquidity grabs are sophisticated strategies often employed by institutional players,

leaving many traders, even the experienced ones, feeling outplayed. However, there’s
a silver lining for those ready to delve into the dynamics of these market maneuvers.
By understanding liquidity grabs and effectively using the support and resistance

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indicator, you can shift from being at the mercy of the market to navigating it with
confidence.

This article aims to clarify the concept of liquidity grabs and illustrate how a
straightforward tool like the support and resistance indicator can be pivotal in
recognizing and responding to these market movements. We’ll cut through the
technical jargon to provide you with practical, actionable strategies. So, let’s gear up to
explore the ins and outs of liquidity grabs, turning information into empowerment.

What exactly are liquidity grabs? Picture them as strategic traps set by the
market’s heavyweights, designed to trigger stop-loss orders through intentional price
movements.

Why does this matter to you? Because understanding these sudden market shifts
can safeguard your trades from unnecessary losses, enable strategic entry points, and
bolster your trading confidence.

Let’s start by demystifying liquidity grabs…

Understanding Liquidity Grabs: The Market’s Bait and Switch. Imagine

tossing a lure into a pond, drawing in a swarm of fish, only to capture them all with a
swift sweep of a net. This analogy paints a vivid picture of a liquidity grab in the Forex
market, where major players bait traders with short-lived price movements, triggering
a cascade of stop-loss orders, before sharply reversing direction.

The Bait: A price move towards a support or resistance level tempts traders to place
stop-loss orders just beyond these points.

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The Switch: Suddenly, the price breaches these levels, activating the stop-loss orders,
thereby creating a liquidity pool for the big players to exploit by reversing the price
direction.

Who’s behind these Liquidity Grabs? Think of the financial behemoths –

investment banks, hedge funds, and other institutional investors wielding the power to
significantly influence the market. Their objectives with liquidity grabs include
managing large positions and testing market resilience without causing drastic price
movements.

But here’s why you should pay attention: Falling into a liquidity grab can lead to
premature stop-loss triggers, emotional trading, and missed opportunities. By
recognizing these setups, you might be able to anticipate market reversals, positioning
yourself on the profitable side of the equation.

However, it’s crucial to stay alert to the risks, such as misinterpreting market signals or
underestimating the impact of global events and news on market volatility. While this
guide aims to simplify liquidity grabs, mastering their identification and response will
require practice and continued learning.

Identifying Liquidity Grabs Using the Support and Resistance Indicator:

The support and resistance indicator, Imagine it as a radar scanning for significant
price levels where the currency pair historically shows resistance to falling below
(support) or climbing above (resistance). These levels are the battlegrounds, offering
clues to potential liquidity grabs.

1: Identifying Key Levels:

With your Forex chart open, activate the support and resistance indicator. Focus on:

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Identifying Key Levels:
Multiple Touches: Zones where the price has repeatedly bounced off support or
hesitated at resistance. These areas are crucial, indicating significant market interest.
Strong Reactions: Pay attention to candlestick patterns and volume spikes near these
levels, signifying intense buying or selling pressure.
It’s essential to understand that while these levels offer insights, they’re not infallible.
Prices can breach these zones, but by identifying them, you’re better positioned to spot
potential liquidity grabs.

2: Watching for False Breakouts: The Market’s Bluff

The crux of identifying a liquidity grab lies in spotting false breakouts—when the price
momentarily breaches a support or resistance level only to retract. Differentiating
between a false breakout and a genuine market move is key:

Watching for False Breakouts: The Market's Bluff

False Breakout:The price extends beyond the zone but fails to close outside it,
resembling a feint.
Valid Breakout: A decisive move through the level with consecutive closes outside the
zone, suggesting a new trend rather than a liquidity grab.
Aim to pinpoint false breakouts within key zones, as they often precede a liquidity
grab.

3: Confirming the Liquidity Grab: The Evidence

To reinforce your suspicion of a liquidity grab, look for confirmation signals:

Confirming the Liquidity Grab: The Evidence

Reversal Candlestick Patterns: Patterns like pin bars or engulfing candles may indicate
a pending reversal.
Volume Surge: An increase in volume following a false breakout lends credence to the
liquidity grab scenario.
But exercise caution and seek confirmation before proceeding with a trade to avoid
jumping on every signal.

Get the Free Support and Resistance Indicator

Example 1: Identifying a Liquidity Grab at the Support Zone

In this example let’s identify a liquidity grab at a Support Zone. Take a look at the
pitvure below while following the steps as described

Identifying a Liquidity Grab at the Support Zone

Step 1: Formation of the Support Zone
In our chart, we observe a EURGBP forming a clear support zone. This zone is
identified by two distinct points where the price bounces upward after touching a

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specific level, indicating strong buying interest that prevents the price from falling
further.

Step 2: Price Returns to the Support Level

As the price approaches this support level again, traders watch closely. The expectation
is that the price will either bounce back as it has in the past, indicating the support
level holds, or break through, suggesting a potential shift in market sentiment.

Step 3: False Breakdown and Immediate Reversal

The price momentarily dips below the support level, seemingly signaling a breakdown.
However, it quickly reverses direction and closes above the support level within the
same or the next trading period. This false breakout is a classic sign of a liquidity grab,
as it triggers stop-loss orders placed below the support level before the price moves
back up.

Step 4: Confirmation of the Liquidity Grab

Traders look for a confirmation signal, such as a bullish reversal candlestick pattern
(e.g., a hammer or engulfing pattern) following the false breakdown. This pattern,
coupled with increased buying volume, confirms the liquidity grab and suggests a
potential buying opportunity.

Example 2: Identifying a Liquidity Grab at the Resistance Zone

Now let’s identify a liquidity grab at a Resistance Zone. Take a look at the pitvure
below while following the steps as described.

Identifying a Liquidity Grab at the Resistance Zone

Step 1: Formation of the Resistance Zone
The chart shows a currency pair encountering resistance at a particular level, where
the price fails to break higher on two separate occasions. This level becomes a marked
resistance zone, indicating selling pressure that caps price advances.

Step 2: Price Approaches the Resistance Level

When the price nears the resistance level for another test, traders are alert for possible
outcomes: a breakthrough, indicating bullish strength, or a rejection, suggesting the
resistance holds firm.

Step 3: False Breakout and Swift Pullback

This time, the price briefly spikes above the resistance level, tempting traders into
believing a breakout is underway. However, it quickly falls back below the resistance
level, forming a false breakout. This movement traps traders who went long above the
resistance and is indicative of a liquidity grab.

Step 4: Confirmation of the Liquidity Grab

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For confirmation, traders seek a bearish reversal candlestick pattern (e.g., a shooting
star or bearish engulfing pattern) following the false breakout, alongside an increase in
selling volume. This combination signals that the resistance zone remains strong and
that the liquidity grab could lead to a downward price movement.

These examples illustrate the step-by-step process of identifying liquidity grabs at both
support and resistance zones, guiding traders through potential scenarios for strategic
entry points in the Forex market.

Final Thoughts:
In conclusion, mastering the identification of liquidity grabs using support and
resistance indicators is a valuable skill in Forex trading. It enables traders to make
informed decisions, avoid common pitfalls, and potentially capitalize on market
movements. Remember, practice and continuous learning are key to success in the
ever-changing Forex market. Keep analyzing, stay disciplined, and refine your
strategies for better outcomes.

Quiz Time
To ensure you’ve fully grasped the concept of identifying liquidity grabs in the Forex
market using a support and resistance indicator, let’s test your understanding with two
relevant questions.

Question:
When observing a potential liquidity grab at a support level, what key signal should
you look for to confirm a false breakdown and a possible entry point for a buy
position?

Your participation is encouraged, as it helps deepen the understanding of liquidity

grabs and the strategic use of support and resistance indicators in trading.