How to Read ICT Liquidity Pools: The Magnet vs. Fuel Strategy

You place your stop loss just above a recent high, feeling secure in your technical analysis. Minutes later, price spikes, hits your stop to the pip, and immediately reverses 100 pips in your original direction. This isn't 'bad luck' or a broker conspiracy—it is the market algorithm functioning exactly as intended. To the institutional 'Smart Money' player, your stop loss isn't a barrier; it is the necessary fuel required to fill their massive positions.

In this guide, we stop looking at liquidity as a threat and start viewing it as the ultimate roadmap. You will learn to identify where the 'Magnet' is pulling price and where the 'Fuel' is waiting to ignite the next major move. By the end of this article, you'll stop being the liquidity and start trading alongside it.

Beyond Support and Resistance: Liquidity as Market Fuel

Most retail traders are taught that a 'resistance level' is a ceiling where price should drop. In the Inner Circle Trader (ICT) methodology, we view those same levels as Buy-Side Liquidity (BSL). Conversely, 'support' is actually Sell-Side Liquidity (SSL). These aren't just lines on a chart; they are clusters of buy-stop and sell-stop orders sitting at obvious structural points.

Think about it from the perspective of a central bank or a massive hedge fund. If you need to buy 5,000 lots of EUR/USD, you can't just click 'buy' at the current market price without moving the market against yourself by 30 pips. To fill a massive buy order, you need an equal amount of sell orders. Where are those sell orders? They are the sell-stops of retail traders who have placed their stops below a recent low.

Pro Tip: The market moves from one pool of liquidity to another. It is either seeking a Fair Value Gap (rebalancing) or seeking a Liquidity Pool (expansion).

According to the CME Group, liquidity is the ability to execute large transactions with minimal price impact. For institutions, seeking 'Fuel' (your stops) is a mechanical necessity. They must 'sweep' the retail support to find enough sell orders to fill their institutional buy positions. This is why price often 'fake breaks' a level before a massive move in the opposite direction.

Engineered Liquidity: Identifying High-Probability Magnets

Not all highs and lows are created equal. The most powerful 'Magnets' for price are what ICT calls Engineered Liquidity. This typically takes the form of Equal Highs (EQH) or Equal Lows (EQL).

When you see two or more peaks at the exact same level (a 'Double Top'), retail textbooks tell you it's a strong reversal signal. To the algorithm, that level is a gold mine. Because so many traders have placed stops just above those equal highs, the pool of liquidity there is massive. The market is highly likely to be drawn to that level like a magnet to clear those orders before moving lower.

Time-Sensitive Benchmarks

Beyond structural patterns, the algorithm prioritizes specific time-based levels:

• Previous Day High (PDH) and Previous Day Low (PDL): These are the primary daily targets.
• Session Highs/Lows: The London session often creates the high or low of the day by sweeping the Asian Range. You can learn more about this in our guide on ICT Asian Range Liquidity.

Example: If GBP/USD has been trending higher and leaves Equal Highs at 1.2750, and the PDH is at 1.2755, that 5-pip zone is a high-probability 'Magnet.' Expect price to reach that level regardless of what your RSI indicator says.

The Draw on Liquidity: Predicting the Market's Next Move

Before you ever look for an entry, you must identify the Draw on Liquidity (DoL). This is the 'Magnet' price is currently gravity-bound toward. To find the DoL, you must look at the Higher Timeframe (HTF), such as the Daily or 4-Hour chart.

Is the HTF trend bullish? If so, the most likely DoL is the nearest Buy-Side Liquidity pool (an old high or EQH). If the trend is bearish, the DoL is the nearest Sell-Side Liquidity pool.

External vs. Internal Liquidity

Market delivery moves in a cycle between External Liquidity (Major Swing Highs/Lows) and Internal Liquidity (Fair Value Gaps or Order Blocks).

1. Price sweeps an External pool (e.g., PDH).
2. Price then retraces into an Internal range to find a Fair Value Gap (FVG).
3. Once the FVG is filled, price targets the next External pool (e.g., PDL).

Before every trade, ask yourself: "Who is trapped right now, and where is the nearest pool of money the market needs to reach?" If you can't answer that, you are likely the one being trapped.

Sweep or Shift? Distinguishing Traps from Transitions

One of the biggest mistakes intermediate traders make is entering as soon as a level is touched. You must distinguish between a Liquidity Sweep (a trap) and a Market Structure Shift (MSS) (a transition).

A Sweep occurs when price pokes above a high, grabs the stops, and immediately closes back inside the range, often leaving a long wick. This is the 'Fuel' being consumed. However, a sweep alone isn't an entry signal. You need to see Displacement.

Displacement is a violent, energetic move away from the liquidity pool, characterized by large candles and the creation of Fair Value Gaps. This confirms institutional sponsorship. Once displacement occurs and breaks a local swing low (in a bearish reversal), you have a Market Structure Shift.

Warning: If price breaks a high with small, grinding candles and no displacement, it is likely a breakout, not a sweep. Do not try to short a market that is 'walking' higher without energy.

For a deeper dive into filtering these moves, check out our ICT Market Structure Shift Guide.

The Execution SOP: Trading the Liquidity Cycle

To trade this effectively, you need a Standard Operating Procedure (SOP). We don't guess; we wait for the market to reveal its hand.

Step 1: Identify the Magnet (The DoL)

Identify where price is going on the 1H or 4H chart. Let's say the PDH is sitting at 1.1020 on EUR/USD.

Step 2: Wait for the Fuel (The Sweep)

Watch price on the 5m or 1m chart as it approaches 1.1020. Wait for it to clear the level. Do not sell yet!

Step 3: The Entry (The MSS & FVG)

Wait for price to snap back below the level with displacement, breaking a recent 1m swing low. This is your MSS. Enter on the return to the newly formed Fair Value Gap. This is often referred to as the ICT Optimal Trade Entry.

Example Trade:

Conclusion

Mastering ICT liquidity pools requires a fundamental shift in how you view the charts. Instead of seeing price as a series of random candles, you must begin to see it as a predator hunting for orders. By identifying the 'Magnet' (where price wants to go) and the 'Fuel' (the stops it needs to get there), you align yourself with the path of least resistance.

Start by backtesting the last 20 instances where price swept the Previous Day High—did it provide a reversal setup? The more you see the algorithm at work, the less you'll find yourself being the fuel for someone else's trade. FXNX tools can help you automate the marking of these critical PDH/PDL levels so you can focus on the reaction, not the drawing.

Your Next Step: Download our 'Liquidity Mapping Checklist' and spend your next three trading sessions only marking PDH, PDL, and EQH/EQL to see how price reacts to these 'Magnets'.

Frequently Asked Questions

What is the difference between Buy-Side and Sell-Side liquidity?

Buy-Side Liquidity (BSL) refers to a cluster of buy-stop orders located above old highs, which act as fuel for institutional sell orders. Sell-Side Liquidity (SSL) refers to sell-stop orders located below old lows, which institutions use to fill their large buy positions.

How do I identify the Draw on Liquidity (DoL)?

To identify the Draw on Liquidity, look at the higher timeframe (Daily/4H) trend. Price is typically drawn toward the nearest untapped old high/low or a pool of Equal Highs/Lows that aligns with the current market narrative.

Why does price often reverse after hitting my stop loss?

This happens because your stop loss (and thousands of others) provides the necessary liquidity for institutional traders to enter the market. Once the algorithm has 'swept' the pool of stops, the 'fuel' is consumed, and the market is free to move in the intended direction.