Liquidity Zone Break & Retest
A liquidity zone is an area where price experiences significant buying and selling.
Drawing liquidity zones can be very subjective, but using candle wicks is a helpful rule of thumb.
Start the bottom of your zone at the lowest candle wick within the area of support you have identified and move the top of the zone up to where most candle bodies that bounced off that area of support seem to stop.
For this strategy, you’ll want to identify areas price has experienced notable buying and used as support at least two or three times.
Each time price bounces off the zone, it shows there are orders being filled, but those orders often run out and price begins to slip.
The Liquidity Zone Break & Retest aims to capitalize on this break of significant support by entering short after confirmation buyers are exhausted.
Once you have your liquidity zone mapped out, it will be helpful to identify key levels within that zone such as a candle body/wick low from one of the earlier bounces out of that zone or a candle body/wick high from a previous trend.
This could be a local high/low or even a key daily/weekly level if applicable. This key level will offer confluence for your trade via an additional level of resistance price can retest and reject.
After your zone and key levels are plotted, you’ll watch for price to slowly lose steam and begin to fall below the liquidity zone.
Price could shoot down quickly, but you’ll want to wait for at least one retest after the break to increase the probability of success for the trade.
Traders will commonly enter on the first retest of a liquidity zone, but the more retests you wait for, the higher the chance is the trade will be successful. Entering on a second or third retest is recommended.
As price breaks through the liquidity zone and retests for a second/third time, you will place your order at the very bottom of the zone, which will hopefully get you in the trade on one final retest.
Your stop-loss for the trade will be just beyond the top of the liquidity zone and/or previous local high.
Your take profit for the trade will be at the nearest demand zone, significant level of support, or area of sell-side liquidity.
Valid Liquidity Zone Break & Retest Checklist:
- Zone has demonstrated multiple instances of support/buying
- Price breaks below the zone to create a lower low
- Price retests the zone and breaks below it once again
- Second rejection falls below the previous rejection for another lower low