Video Transcript:
Have you ever had a level that looked just perfect, but the price still went straight through it? That’s usually not random. It’s a stop hunt. The big players are hunting for liquidity. In other words, they’re hunting for your stop-loss.
In this video, you’ll learn how to spot it before it happens so you don’t get caught in a bad trade. I’ll show you two trades. One wins, one fails. Your job is to guess which one will be the winner and which one will be the loser.
So let’s get started. You can see the two trades. The first one is right here, based on a heavy volume zone and this green line, which is potential support. The second trade again has a volume profile with a heavy volume zone here, and again the green line is potential support. But only one will work. One will be a winner, and the other one will be a loser.
Let me show you how the first trade went. The price didn’t respect the support and went straight past it, so it was a losing trade. The reason this trade failed is that the market was hunting for liquidity here.
If you look at the lows of these candles, they are very close to each other. Traders like to place their stop-loss orders at candle lows. When those lows are close together, it creates what I call a stop-loss cluster. A stop-loss cluster is a place where many traders have their stops, and the market likes to go past it to take that liquidity.
When price gets close to a stop-loss cluster, it often shoots past it very quickly. That’s because stop-loss orders are market orders. This is why it’s not clever to place a long trade here when there’s a stop-loss cluster below. It’s very likely the market will test that cluster, and your trade will fail.
Even though we have a nice heavy volume zone and, in an ideal scenario, the market should react to it, it doesn’t because of the stop-loss cluster. Many traders have their stops here. These could be breakout traders, traders trailing stops, or traders who simply place stops at candle lows. They all get trapped and stopped out.
This is a bad trade. I call this a weak low. Many lows close together create a weak low.
Now take a look at the second example. This one was a winner. There’s the heavy volume cluster, a small pullback, and a nice reaction. Compare the lows. In the first case, we had a weak low. In this case, we have what I call a strong low a strong rejection of lower prices.
There is no stop-loss cluster here. Buyers defended this level and pushed the price up. The market doesn’t want to fight those buyers, so instead, it reacts to the heavy volume zone as expected.
This is how you can tell a bad trade with a weak low from a good trade with a strong low.
Now let me show you another example. Again, I want you to tell me which trade is the winner and which one is the loser. We have a heavy volume zone here, and price will pull back to it. Will it react, or will it shoot past it? The same question applies to the second setup.
The first one ended up being a winner. Price reacted and moved up. Look at this low it’s a strong low. There’s no stop-loss cluster, just strong rejection of lower prices at the heavy volume zone. This is a good trade to take.
The second trade is not a good trade. Even though we have a heavy volume zone and a pullback, the price shoots past it. If you look at these two lows, they are at exactly the same level. This is called a failed auction.
A failed auction is a form of a weak low. The market likes to test it because it’s an imperfection. There is usually liquidity below it, so the market wants to see if it’s there. Very often, price will test at least one pip below a failed auction.
Going long from a level with a failed auction below it is risky. That’s why this trade failed.
Again, compare the lows. One is strong, the other is weak. One is good to trade, the other is not.
Now for the last set of examples, this time with short trades. The principles are the same, just reversed. We have a heavy volume zone and a resistance. Price should react, but one trade will fail.
Look at the highs. In the first example, we have many highs close together. This is a huge stop-loss cluster. When price gets close to it, the market often tests it quickly, taking out all those stops. That’s why this resistance wasn’t respected and price went past it.
In the second example, we have a heavy volume zone and a sharp rejection of higher prices. This is a strong high. Even though there are several highs close together, the highest one already took the liquidity out. The stop-loss orders are no longer relevant.
Because of that, the price reacted to the heavy volume zone exactly as it should.
I hope you liked this. I don’t think many people are teaching this, and it’s very actionable. You can start using it right away, no matter what strategy you trade. This is simple market logic.
Test it out and let me know how it works for you.
If you want to learn more about volume profile trading and get access to my custom indicators, head over to trader-dale.com. Click on “Trading Courses and Tools” to browse the Volume Profile Pack, Order Flow Pack, VWAP Pack, and Smart Money Pack or get all four together at a discounted price.
See you next time.
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