What is Liquidity in Trading? Buy Side and Sell Side Explained
Liquidity is one of the most important concepts in trading — and one of the most misunderstood by retail traders. In the ICT and Smart Money framework, understanding where liquidity sits and how institutional traders use it to fill their orders is the foundation of reading market movement correctly.
What is Liquidity?
In trading, liquidity refers to the clusters of stop loss orders sitting above and below price. When retail traders place stop losses at obvious levels — below swing lows, above swing highs, at round numbers, below equal lows — those stops create pools of liquidity that institutional traders need to fill their large orders.
A large institution cannot simply buy millions of dollars worth of NQ contracts at market price — they would move the market against themselves before their order is filled. Instead they engineer moves to trigger retail stop losses, which creates the liquidity (sellers for their buys, buyers for their sells) they need to fill their positions.
Buy Side Liquidity (BSL)
Buy side liquidity sits above price — at swing highs, equal highs, and obvious resistance levels. These are the stop losses of retail short sellers. When price sweeps above these levels it triggers those stops, which are buy orders — providing liquidity for institutional sellers who want to enter short positions at premium prices.
Sell Side Liquidity (SSL)
Sell side liquidity sits below price — at swing lows, equal lows, and obvious support levels. These are the stop losses of retail long traders. When price sweeps below these levels it triggers those stops — providing liquidity for institutional buyers who want to enter long positions at discount prices.
Liquidity Raids — How Smart Money Uses Liquidity
A liquidity raid is when price deliberately sweeps a liquidity level — taking out stops — before reversing in the opposite direction. This is what ICT refers to as "stop hunting." The move above a swing high that immediately reverses lower is not random — it was engineered to collect the buy side liquidity needed to fill a large short position.
How to trade liquidity raids
- Mark your liquidity levels — equal highs, equal lows, previous session highs/lows
- Wait for price to sweep the level — a wick or close beyond it
- Look for a reversal confirmation — displacement candle, FVG, CHoCH
- Enter in the opposite direction with a stop beyond the swept level
Liquidity and Prop Firm Trading
Understanding liquidity is especially valuable for prop firm traders. Knowing where stop hunts are likely to occur means you can avoid being the retail trader whose stop gets taken out before a reversal. Position your entries beyond obvious liquidity levels rather than at them.