L3.1 — What Is Liquidity and Why Does Price Hunt It?

Liquidity in the context of price action refers to clusters of pending orders sitting at predictable levels in the market. Stop-losses placed below swing lows by long traders, and above swing highs by short traders, create dense order clusters that institutional participants will route price through when they need to fill large positions.

This is not a conspiracy theory — it is mechanics. A large buy order needs willing sellers to fill against. The most willing sellers (and the most available supply of sell orders) are the stop-losses of losing long positions sitting below a key swing low. Routing price through that level triggers those stops and simultaneously fills the large buy order at a favourable price.

Understanding this dynamic does not mean you can predict every sweep. It means you stop treating stop hunts as random market malice and start factoring them into your structural analysis — particularly at clean equal highs/lows, round numbers, and obvious previous swing points where retail stop clusters are predictably dense.