What Is Liquidity Trap?
A liquidity trap occurs when price deliberately moves to an area of concentrated orders (stop-losses, breakout entries, or liquidation levels) to fill those orders before reversing direction. Smart money and market makers "hunt" this liquidity because they need it to fill their own large orders with minimal slippage.
How Liquidity Trap Works
Liquidity traps typically occur at obvious technical levels: below clear support (triggering stop-losses), above clear resistance (triggering breakout buys), at round numbers (psychological levels), and below/above recent swing lows/highs. The move to grab liquidity creates a wick that briefly pierces the level before price snaps back.
Why It Matters for Traders
Understanding liquidity traps is one of the most valuable edges in trading. Instead of placing stops at obvious levels where they'll be hunted, place them slightly beyond the likely trap zone. Better yet, place entries at the trap levels — buying where others are being stopped out. The traders who provide the liquidity (getting trapped) fund the moves of those who understand the game.
