How to Avoid a Liquidity Grab in Forex

Forex trading is not easy, we all know this by now! For many years, traders have thrown around the terms ‘manipulation’ and ‘liquidity grabs’ in the market as an excuse for trades being stopped out before then running to the profit targets set by traders. Although this could be due to the fact you’re using an unregulated B-book broker, it’s more likely that you’re falling victim to legitimate liquidity grabs within the markets.

In this article, we’re going to take a look at what liquidity grabs are, how to spot them and how to avoid them, if possible, within the forex markets! So, let’s get into it…

Avoiding Liquidity Grabs In Forex – Is It Possible?

It’s possible to avoid the majority of liquidity grabs in forex, in theory. However, you need to weigh up whether it’s actually worth trying to avoid these moves. Many of our prop firm funded traders don’t spend much time trying to avoid these traps. We say this because there are a huge number of trades per year when the market already has enough orders to move in the direction you’re anticipating and therefore, there will be no liquidity grab. If you’re constantly attempting to avoid being prematurely stopped out of these trades, you’re going to be entering later and add more levels of complexity to your trading plan. Although in principle this is a good idea, sitting out of trades and obtaining worse risk to reward ratios within trades may actually cost you more profits than it saves you!

This is something that needs to be heavily considered and back tested before deciding whether you’re going to sit out of these trades and actively focus on avoiding manipulation in the market. We’d hazard a guess as to the fact you’ll be more profitable by getting hit with these losses, than trying to avoid them all together.

What Is A Liquidity Grab?

Liquidity grabs happen in all markets, and the premise is basic. The market moves further in one direction, to gather further orders and liquidity, before then reversing, due to the sheer volume of orders gathered. Of course, you can go down a rabbit hole when it comes to liquidity and start learning about order flow, order blocks and how liquidity is actually processed within the markets. For retail forex traders, this level of knowledge is typically overkill!

Also, due to the fact the forex market is decentralized, unlike other markets, it makes it relatively impossible to understand liquidity and where liquidity actually lies within the market. You can use price action to help figure this out to the best of your ability, but for the most part, you’ll be guessing!

It’s worth mentioning that these grabs will happen on all time frames, from the M1 to the W1!

What Does A Liquidity Grab Look Like?

Liquidity grabs within the markets are typically effortless to spot, in hindsight. They’re much harder to spot when you’re trading in real time, which is why so many traders get caught out by these ‘traps’ in the markets.  

Above is an example of a liquidity grab a few days ago on Gold (XAUUSD). The market had reached a fairly significant support/demand zone, meaning many retail traders would be looking to take buy positions within the market. From the initial entry point, price pushed up, before retracing back and moving slightly lower than the initial low. This would have stopped out the majority of retail traders with stop losses placed on the lows. After taking the stop losses out, the market proceeded to rally to the next logical high. This means that traders were right in their assumptions of market direction; however, they failed to realize any profits from this trade.

There would have been a huge number of orders sitting below the low for a bullish run of this size to occur, meaning we can clearly tell that numerous orders were stopped out! Once you start to see these moves in the market, you’ll be seeing them everywhere.

How Do You Avoid Getting Caught In A Liquidity Grab?

There are some steps we can take to try our best to avoid being caught in liquidity grabs, but this isn’t going to help us every time! Occasionally, the market will just take our stop losses regardless! Let’s look at an example trade on EURUSD, Daily timeframe.

The market pushed into a clear supply level on EURUSD, indicating a potential sell opportunity for traders. The daily printed a nice bearish candle, which is where the majority of retail traders would have entered a short position, only to be stopped out a week later before their analysis played out and EURUSD moved to the downside.

So, what could you have done to avoid this?

Firstly, enter later with more price action confluences. The market will still completely bullish in nature at the time of the entry, which is where most traders take losses. 

By using a trend line to indicate a break of structure, you’d have been able to avoid the loss (just) and stay in the full short trade!

To play this trade even safer, you should have waited for the market to break the last higher low, meaning price is pushing lower and the market structure is changing. This is a much safer entry if you’re looking to avoid manipulation in the markets.

You could have paired this ‘later’ entry with an EMA break and retest after market structure confirmed your analysis, and you’d have taken a 1:3 risk to reward trade. 

So, although you cannot avoid being stopped out, by waiting for the market to actually confirm the structure you can avoid some of these close calls!

In Summary – Avoiding Liquidity Grabs Is Possible!

In conclusion, it’s very possible to try to avoid liquidity grabs in forex, but it may not be worth doing! You can avoid the majority of liquidity grabs by entering later into trades and waiting for market structure to be confirmed. However, these late entries will typically cause you to generate worse returns in the market, and it’s something that needs to be heavily considered and back tested before applied to your live trading strategies. Many of our Elite Traders Club traders have developed strategies around this, but like we repeatedly say, testing is key!

Do you have a strategy to avoid liquidity grabs and manipulation?

Are you looking to become a prop firm funded trader? Work with Lux Trading Firm now!