Liquidity Pools: The Complete Guide to ICT and SMC – Part 6

#What Is a Liquidity Pool?

A Liquidity Pool is an area of the market where a large number of pending orders are concentrated.

One of the most common sources of this liquidity is traders' stop-loss orders.

For example, a trader who sells near a resistance level will usually place a stop loss slightly above the previous high. At the same time, breakout traders may place buy orders above that same resistance level.

As a result, a concentration of buy orders may develop above an obvious high.

In ICT and SMC, price action is not analyzed only by looking at candlestick patterns. The location of liquidity and pending orders around market structure also plays an important role.

#What Are Buy-Side and Sell-Side Liquidity?

To understand liquidity pools, it is essential to distinguish between the two primary types of liquidity.

#Buy-Side Liquidity

Buy-Side Liquidity (BSL) is generally found above market highs.

These areas may contain:

• Stop losses from short positions

• Buy-stop orders above resistance

• Breakout entry orders

• Orders accumulated above previous highs

For this reason, obvious market highs can become potential liquidity targets.

#Sell-Side Liquidity

Sell-Side Liquidity (SSL) is generally found below market lows.

These areas may contain:

• Stop losses from long positions

• Sell-stop orders below support

• Bearish breakout orders

• Orders accumulated below previous lows

Therefore, obvious market lows may also act as liquidity pools.

Buy-Side Liquidity is typically found above highs, while Sell-Side Liquidity is typically found below lows.

#How Are Equal Highs and Equal Lows Related to Liquidity?

One of the clearest structures used when analyzing liquidity is Equal Highs and Equal Lows.

#Equal Highs

When price reaches approximately the same level several times and forms similar highs, traders may begin treating that area as resistance.

Short sellers may then place their stop-loss orders above those highs.

This can create a Buy-Side Liquidity pool above the Equal Highs.

#Equal Lows

The opposite applies to Equal Lows.

When several lows form around approximately the same price level, traders may consider the area support and place stop losses from long positions below it.

This can create Sell-Side Liquidity below the Equal Lows.

The more obvious a price level becomes to market participants, the more relevant the concentration of orders around that level may become.

#How Does Liquidity Form Around Trendlines?

Liquidity does not only form above horizontal highs or below horizontal lows.

Trendlines can also create predictable areas where traders tend to place stop orders.

For example, if price has repeatedly reacted to an ascending trendline, some traders may buy the next touch of that trendline and place their stop losses below it.

As a result, sell-side orders can accumulate beneath the trendline.

Instead of treating a trendline only as support or resistance, ICT and SMC traders can ask a more useful question:

If traders are trading this structure, where are their stop losses likely to be placed?

That question can provide a clearer view of where liquidity may be located.

#What Is a Liquidity Sweep?

A Liquidity Sweep occurs when price moves into a liquidity pool, triggers the orders located there, and then shows signs of rejection or movement in the opposite direction.

For example:

Price moves above several Equal Highs, takes the Buy-Side Liquidity above them, and then moves sharply lower.

This may be interpreted as a Buy-Side Liquidity Sweep.

However, there is one important rule:

Price does not have to reverse every time liquidity is taken.

This is why traders need to understand the difference between a Liquidity Sweep and a Liquidity Run.

#Liquidity Sweep vs. Liquidity Run

A Liquidity Run occurs when price reaches a liquidity area, trades through it, and continues moving in the same direction.

Suppose price approaches a previous high.

Two broad scenarios can occur.

#Scenario 1: Liquidity Sweep

Price trades above the high, triggers the orders located there, and then shows a clear reaction back below the level.

This behavior may represent a Liquidity Sweep.

#Scenario 2: Liquidity Run

Price breaks above the high and continues moving higher without a meaningful rejection.

In this case, traders should not assume a reversal simply because liquidity above the high has been taken.

Taking liquidity is an event, not an independent entry signal.

#How to Identify Liquidity Pools Step by Step

A structured process can make liquidity analysis more practical.

#Step 1: Identify Obvious Market Structures

Start by locating levels that are clearly visible to a large number of traders:

• Previous highs

• Previous lows

• Equal Highs

• Equal Lows

• Obvious support and resistance

• Trendline-related structures

Then ask where traders are likely to place their stop-loss orders.

#Step 2: Determine the Liquidity Type

If the orders are located above market highs, you are generally dealing with Buy-Side Liquidity.

If they are located below market lows, you are generally dealing with Sell-Side Liquidity.

This simple distinction helps create a clearer liquidity map.

#Step 3: Check the Higher Timeframe

Higher Timeframe analysis is important when evaluating liquidity.

A liquidity pool may appear significant on a lower timeframe, while the broader market structure suggests that price is still moving toward a larger objective.

This is why smaller liquidity pools should not always be analyzed in isolation.

#Step 4: Wait for Liquidity to Be Taken

Price reaching the liquidity pool is only the first part of the analysis.

After liquidity is taken, observe how price behaves.

Ask:

• Did price quickly return inside the previous range?

• Did strong displacement occur?

• Did market structure change?

• Is price continuing aggressively in the same direction?

These questions can help distinguish a potential Liquidity Sweep from a Liquidity Run.

#Step 5: Look for Confluence

A liquidity pool should not be the only reason for entering a trade.

It can be analyzed together with market structure and other ICT concepts such as a Breaker Block.

When several independent pieces of evidence support the same market scenario, the analysis becomes more structured.

#A Simple Liquidity Pool Example

Suppose price reaches the 100 level three times and moves lower after each attempt.

The chart now contains three approximately equal highs.

Many traders may view 100 as resistance and enter short positions. Their stop-loss orders will likely sit slightly above 100.

At the same time, breakout traders may place buy orders above the same resistance level.

A Buy-Side Liquidity Pool can therefore develop above these Equal Highs.

If price moves to 101, triggers the orders above the highs, and then strongly returns below 100, the move may be analyzed as a Liquidity Sweep.

However, if price moves through 101 and continues strongly higher, the move is more consistent with a Liquidity Run.

What happens after liquidity is taken is just as important as the liquidity event itself.

#Why Trading Every Liquidity Sweep Can Be a Mistake

One of the most common mistakes is assuming that price must reverse immediately after taking a high or low.

The market has no obligation to do so.

Price can remove liquidity from a level and continue moving in the same direction.

Traders should therefore distinguish between these two statements:

“Liquidity has been taken.”

and

“The market has confirmed a reversal.”

They do not mean the same thing.

#Why Higher Timeframes Matter in Liquidity Analysis

When traders focus exclusively on lower timeframes, they can usually find many highs, lows, and potential liquidity pools.

The problem is that not all liquidity pools have equal significance.

Higher Timeframe analysis can help determine:

• The broader market structure

• Which liquidity pools are more significant

• Which side of the market contains the primary liquidity objective

• How the current price movement fits into a larger market scenario

A practical approach is therefore to establish the broader market context first and then use lower timeframes for more detailed analysis.

#Key Takeaways

• A Liquidity Pool is an area where multiple orders may be concentrated.

• Buy-Side Liquidity is generally found above market highs.

• Sell-Side Liquidity is generally found below market lows.

• Equal Highs and Equal Lows are important structures when identifying liquidity.

• Trendlines may also create concentrations of stop orders.

• Taking liquidity does not automatically mean price will reverse.

• Traders should distinguish between a Liquidity Sweep and a Liquidity Run.

• Higher Timeframe analysis helps determine which liquidity pools matter most.

• Price behavior after liquidity is taken is critical.

• Liquidity should be analyzed together with market structure and other confirming factors.

#Summary

Liquidity Pools are areas where a concentration of market orders, particularly stop orders, may exist.

Within ICT and SMC, liquidity above highs is generally classified as Buy-Side Liquidity, while liquidity below lows is classified as Sell-Side Liquidity.

Equal Highs, Equal Lows, and other obvious market structures can therefore become important liquidity areas.

However, taking liquidity does not automatically mean that price will reverse.

Traders should analyze what happens after liquidity is taken, consider the Higher Timeframe market structure, and look for additional confirmation before developing a trading scenario.

#Frequently Asked Questions

#What is a Liquidity Pool in ICT?

A Liquidity Pool is an area of the chart where multiple orders, particularly stop orders, are concentrated. Previous highs, previous lows, Equal Highs, and Equal Lows are common areas where liquidity can develop.

#Where is Buy-Side Liquidity located?

Buy-Side Liquidity is generally located above market highs, where stop losses from short positions and buy orders above resistance may accumulate.

#Where is Sell-Side Liquidity located?

Sell-Side Liquidity is generally located below market lows, where stop losses from long positions and sell orders below support may accumulate.

#Does taking liquidity always mean price will reverse?

No. Price can take liquidity and continue moving in the same direction. Traders should evaluate the subsequent price reaction and market structure before assuming a reversal.

#What is the difference between a Liquidity Sweep and a Liquidity Run?

During a Liquidity Sweep, price takes liquidity and then typically reacts in the opposite direction. During a Liquidity Run, price trades through the liquidity area and continues moving in the same direction.

#Is a Liquidity Pool enough to enter a trade?

No. Liquidity should preferably be analyzed together with Higher Timeframe context, market structure, price reaction, and additional confirmation.