Where is liquidity typically found in the market?

• A. Rests in higher highs, lower lows, and equal highs and lows. Highs get swept and price sells off, lows get swept and price rallies.
• B. Only at recent swing highs.
• C. Only at recent swing lows.
• D. Inertia of momentum without specific levels.

Answer: (A)

Liquidity sits where traders have placed resting orders, especially around swing highs and swing lows. These areas collect a lot of stop and limit orders, so when price returns and “sweeps” those levels, those orders fire off as market orders and push price quickly in the opposite direction. That’s why the concept says liquidity rests at higher highs, lower lows, and even at equal highs and lows: there are resting orders above recent highs and below recent lows, plus at points where highs or lows align. A sweep of the highs tends to trigger sell stops, producing a sell-off, while a sweep of the lows tends to trigger buy stops, producing a rally.

This explains why liquidity isn’t confined to just the most recent high or the most recent low, and why momentum alone doesn’t define where liquidity sits.