Financial Analyst/ Guest author, RADEX MARKETS
Lee W. is a seasoned professional trader with over 10 years of experience. Passionate about sharing valuable expertise and unique market insights, Lee W. now serves as an external and independent market analyst for RADEX MARKETS.
AZIONI
You mark a support or resistance level, wait patiently for price to reach it and place your trade. Price then pokes through the level, triggers your stop-loss and promptly moves back in the direction you expected in the first place. It is one of those trading experiences that can make you wonder whether the market or the trading Gods have a personal vendetta against you.
The same frustration appears when trading breakouts. Price pushes above a familiar high, you enter expecting momentum to continue, and the breakout collapses almost immediately. What looked like the beginning of a new move turns out to be little more than a quick raid on the orders sitting beyond the level.
Many of these movements can be better understood by studying liquidity zones.
A liquidity zone is an area on a price chart, where resting orders cluster together. These may include stop-loss orders, breakout entries and limit orders positioned around levels that large numbers of traders can see. Because bigger market participants need willing buyers and sellers to execute substantial positions, price is often drawn towards these pools of orders before deciding where to move next. LuxAlgo and VasilyTrader both describe liquidity zones as broader chart areas where trading orders or activity become concentrated.
This article is not about which currency pair, or trading session has the highest overall liquidity. Instead, it focuses on order-cluster areas visible on a forex chart.
This guide will take you through:
Demand zones will be used as a contrast and confirmation tool, but liquidity zones remain the main focus. Once you recognise where orders are likely to be waiting, many apparently random price movements begin to make rather more sense.
A liquidity zone in forex is a price area where stop-losses, pending orders and breakout entries cluster, usually beyond previous highs and lows, equal highs or lows, and significant round numbers. Price often reaches into a liquidity pool to fill these orders before either rejecting the area or continuing through it.
A demand zone is the consolidation base from which a strong bullish move previously launched. When price returns for the first time, remaining buying interest may produce another reaction, although no response is guaranteed.
Open a trading account with Radex Markets to practise identifying liquidity zones and managing your setups in live market conditions.
A liquidity zone is an area where a concentration of trading orders is likely to be waiting. These orders commonly collect just beyond visible highs and lows because traders tend to place stop-losses and breakout entries around the same obvious levels.
This concentration creates what is often called a liquidity pool in forex. Price may be drawn towards the pool because larger orders require enough buyers or sellers on the other side of the transaction. The zone therefore acts more like a target than a traditional support or resistance line.
Read more: Forex Liquidity Pools: Spot and Trade Strategically
A demand zone is the price area where a strong bullish move originated. It normally appears as a short consolidation or base followed by a sharp move higher, suggesting that substantial buying took place there. If some buy orders remain unfilled, they may help price react when it returns to the area.
A supply zone is simply the bearish equivalent. It marks the base from which a strong downward move began. However, for this guide, demand and supply zones are supporting concepts rather than the main attraction.
Aspect |
Liquidity zone |
Demand zone |
|---|---|---|
| What it marks | An area where stop-losses, breakout entries and pending orders cluster | The consolidation base from which a strong bullish move began |
| What price does there | Price is often drawn towards the zone to access and fill orders | Price may react upwards when it returns to the zone |
| Underlying logic | Large orders require enough counterparties to be executed efficiently | Unfilled or renewed buying interest may remain around the original base |
| How it forms | Around visible highs, lows, equal levels, round numbers and other widely watched areas | Through consolidation followed by a sharp bullish departure |
| Typical trade | Trade a confirmed sweep and rejection or a breakout followed by a retest | Look for a long entry after price returns and shows bullish confirmation |
| Main role | Provides a potential target and decision area | Provides a possible entry or reaction area |
| Invalidation clue | Price closes beyond the zone and continues to hold there | Price closes decisively below the base and fails to recover |
An easy way to remember the difference is this: a liquidity zone shows where price may be drawn, a target, while a demand zone shows where a move launched, an origin.
The two zones can also overlap. When a liquidity sweep occurs inside a fresh demand zone, both order-flow ideas support the same setup, creating the strongest combination we will trade later in this guide.
Trading liquidity zones means identifying areas where a large number of orders are likely to be waiting and then observing how price behaves when those orders are reached. The idea is not to predict every market turn. It is to narrow your attention to the places where a meaningful reaction or continuation is more likely to occur.
Orders cluster because traders generally respond to the same visible chart features. Previous highs, equal lows, round numbers and session extremes are easy to recognise, so stop-losses, breakout entries and limit orders naturally gather around them.
A pending or resting order is simply an instruction placed in advance to buy or sell when price reaches a specified level. It remains inactive until the market trades at that price.
Read more: What Is a Pending Order? Understanding How It Works in Trading
Visibility itself creates the order cluster. If thousands of traders can see the same high, many will make similar decisions:
This is why a liquidity zone should be drawn as an area rather than a single horizontal line. Orders are rarely placed at one identical price. They are scattered across a narrow band around the obvious level, making a rectangle more practical than expecting price to react perfectly to a line drawn with the precision of a laser engineer.
Read more: What is liquidity in Forex and how is it measured
Every completed trade requires a buyer and a seller. Larger market participants therefore need enough orders on the opposite side to execute substantial positions without excessive slippage.
Slippage is the difference between the requested trade price and the price at which the order is actually filled. If a participant tries to execute a large order where few counterparties are available, the order may be filled across several prices, making the overall entry less favourable.
Liquidity pools provide more potential counterparties. This helps explain why price often travels towards areas containing visible clusters of stop-losses and pending orders. It is an execution mechanism, not evidence that an institution has personally located a retail trader’s £300 account and decided that today is the day to ruin it.
A volume increase may appear when price enters a liquidity zone, but the volume spike is the result of orders being activated, not the definition of the zone. A liquidity zone exists because orders are waiting there before price arrives.
Buy-side liquidity generally sits above obvious highs, where short positions’ stop-losses and bullish breakout orders can become market buys. Sell-side liquidity tends to sit below obvious lows, where long positions’ stops and bearish breakout orders can become market sells. The deeper subject of using buy-side and sell-side liquidity to determine direction belongs in its own guide.
Read more: Buy Side and Sell Side Liquidity: How to Identify and Use Them
The most common trading liquidity zones form around levels that are easy for a large number of market participants to recognise:
Each type can attract orders, but they do not all deserve equal weight on the chart.
Previous highs and lows are established price extremes from earlier trading periods. Daily, weekly and monthly highs and lows are among the most closely watched reference points on a forex chart.
Stops from trend traders and entries from breakout traders often collect just beyond these extremes. Because so many market participants track them, previous highs and lows are usually the first and highest-priority liquidity zones to mark.
Equal highs and lows form when price tests approximately the same level more than once. They commonly appear as double tops, double bottoms or repeated swing points.
The second reaction persuades many traders that the level has been “proven”. They then place stops just beyond it, while breakout traders wait on the other side. That tidy collection of orders is precisely what makes equal highs and lows attractive liquidity targets.
Round-number liquidity zones form around psychologically familiar prices, such as 1.1000, 1.1050 or 150.00. Traders find these numbers easier to remember and frequently use them for entries, stops and profit targets.
This behaviour is more than chart-room folklore. A Federal Reserve Bank of New York study by Carol Osler, based on the conditional order book of a large foreign-exchange dealing bank, found strong clustering at round numbers. Approximately 8.7% of the sampled orders were placed at rates ending in 00, with smaller clusters at levels ending in 50, 0 and 5.
The research used historical order data from 1999–2000, so it should not be treated as a current market-wide measurement. However, it provides useful evidence for the long-observed tendency of forex orders to collect around round-number levels.
Session highs and lows are the highest and lowest prices recorded during a particular forex trading session. The Asian-session range is especially useful because its extremes are often tested after London opens and market participation increases.
Stops tend to collect beyond both sides of the range, while breakout traders wait for a decisive move through it. This makes session extremes a particularly practical form of intraday liquidity pool in forex trading.
Read more: Best time to trade forex: When to enter the market during the day
Trendline liquidity zones develop around repeated diagonal support or resistance touchpoints. Traders using the trendline often place their stops just beyond it, causing orders to spread along the line as it moves through time.
Unlike a horizontal liquidity zone, its location changes with every new candle. Trendlines should therefore be treated as moving bands rather than fixed prices, with greater importance given to areas where they meet a horizontal level.
Volume-based liquidity zones are areas where unusually heavy trading activity has previously occurred. High-volume nodes on a volume profile may indicate prices where participation was strong and where traders retain a degree of market memory.
There is an important limitation in spot forex: no central exchange records the entire market’s trading volume. Most platforms display tick volume or broker-specific volume, which can be useful as an indication of activity but does not represent every transaction across the global currency market.
A confluence zone forms when two or more liquidity references occupy the same price band. For example, a previous weekly high may sit near 1.1000 while also forming a set of equal highs.
The more independent reasons traders have for placing orders in one area, the more attention that zone deserves. A previous high combined with a round number and equal highs is considerably more meaningful than a random line with no obvious explanation behind it.
This gives us a practical ranking rule: the more credible liquidity features stacked within the same narrow band, the more significant the zone is likely to be. That rule becomes central when we start marking and ranking zones on an actual chart.
Identifying liquidity zones is a repeatable procedure rather than an exercise in chart intuition. The process has three stages: mark the reference levels, set the boundaries and rank the finished zones.
Following the stages in order helps prevent a common problem, drawing a rectangle around every minor price movement and calling all of them important.
Begin by selecting the three to five most obvious levels on the chart. Previous daily and weekly highs and lows should normally come first, followed by equal highs or lows and major round numbers.
Your initial list might include:
Avoid marking every swing point. When a chart contains 15 supposed liquidity zones, none of them receives meaningful priority and price seems to be “reacting” everywhere.
My own morning routine is fairly simple. Before the London open, I spend around ten minutes marking yesterday’s GBP/USD high and low, circling any clear equal highs or lows, and noting the nearest round number.
For example, if GBP/USD were trading around 1.3290, I might mark a previous high at 1.3368, equal lows around 1.3260 and the nearby 1.3300 round-number area. These are illustrative prices, but they sit within a realistic contemporary GBP/USD range; the pair was trading near 1.3290 when this section was prepared.
That small list gives me a usable map. I am not trying to decorate the chart until very little chart remains visible.
A liquidity zone should cover the part of the reference area where orders are most likely to be distributed. The most practical method is to box the space between the candle’s extreme wick and the furthest relevant closing price.
A wick is the thin part extending above or below a candle’s body, showing the highest or lowest price reached during that period.
Use the following mechanical boundary rules.
If the liquidity zone is above current price:
If the liquidity zone is below current price:
The logic is mirrored because the position of price has changed. In both cases, the band between the extreme wick and the relevant close is the area where orders are often most densely concentrated and where a sweep may produce a quick rejection.
Suppose GBP/USD is trading below a previous-high area. On the four-hour chart, several candles tested that region:
- Highest wick: 1.3368
- Highest candle close: 1.3354
- Current illustrative price: 1.3290
The liquidity zone would be boxed from 1.3354 to 1.3368.
For GBP/USD, one pip is normally represented by the fourth decimal place. The zone is therefore:
1.3368 − 1.3354 = 0.0014, or 14 pips wide
This gives us an objective zone rather than a line placed somewhere around 1.3360 because it looked about right at the time.
The 14-pip width also becomes useful later. If price sweeps the zone and produces a valid short setup, the stop can be placed beyond 1.3368 with an appropriate buffer. The chart structure, rather than an arbitrary number of pips, provides the basis for the stop distance.
Once the boundaries have been drawn, each liquidity zone should be confirmed and ranked. A clearly marked zone is not automatically a high-quality trading area.
Four useful confirmation signs are:
Tick volume records how often a price changes within a period rather than the total volume traded across the entire forex market. It is supporting evidence, not proof of the orders sitting inside a zone.
Confluence means that several independent reference points occupy the same price area. The more credible reasons traders have for placing orders within one band, the more weight that zone should receive.
For example:
Illustrative A-list zone: GBP/USD has a previous weekly low at 1.3303, the psychological 1.3300 level and a pair of equal lows at 1.3298. These references occupy a five-pip band, giving traders several reasons to place orders in the same area.
By comparison:
Illustrative B-list zone: A rising trendline touches price at 1.3265, but there is no previous high or low, round number, volume confirmation or demand zone nearby. It remains worth observing, but it does not deserve the same trust.
A single-reference zone receives what I call “half trust”. I may keep it on the chart, but I will not build a trade around it without further evidence.
The strongest combination in this guide occurs when a liquidity zone overlaps a fresh demand zone. The liquidity area identifies where orders may be swept, while the demand zone provides a separate reason for buying pressure to appear.
Liquidity zones form on every timeframe, but higher-timeframe areas generally carry more weight because more traders and larger market participants can see them.
A useful workflow is:
Drawing on a higher timeframe and executing on a lower one provides context without forcing an unnecessarily wide entry. The Asian-session high and low are particularly useful because they are often among the first intraday liquidity areas tested as London participation increases.
My own filter is simple: if I cannot explain why orders would be waiting in a zone, I do not draw it.
A demand zone is the consolidation base immediately preceding a strong bullish move. Look for a small group of candles trading within a narrow range, followed by an obvious and rapid departure to the upside.
To draw the zone:
For example, suppose GBP/USD consolidates between 1.3220 and 1.3240 before rising quickly to 1.3340. The 20-pip base becomes the demand zone. If price later returns to 1.3240–1.3220, traders will look for evidence of renewed buying rather than entering automatically.
A stronger demand zone usually has:
Repeated visits can weaken the area because the orders responsible for earlier reactions may gradually be filled.
The simplest way to tell the two concepts apart is this: liquidity zones are drawn beyond obvious highs or lows where orders cluster; demand zones are drawn around the consolidation base from which a bullish move began.
Price reacts at liquidity zones because large transactions require enough opposing orders to be executed efficiently. A buyer needs a seller, and a seller needs a buyer. When a large number of stops and pending orders collect around an obvious level, the area provides the counterparties required to fill bigger positions.
Suppose EUR/USD approaches a previous weekly high at 1.1500. Stop-losses from short sellers may sit just above the high, alongside buy orders from breakout traders. When price moves through the level, those orders are activated, creating a burst of buying activity.
What happens next depends on how that activity is absorbed:
Market memory also helps liquidity zones refill. Once traders have seen price react around a particular level, they often place new stops, entries and profit targets in the same area. An old zone can therefore become relevant again, although a recently swept zone normally carries less immediate weight.
Demand zones work differently. A sharp rally from a consolidation base may leave some institutional or larger buying interest unfilled. When price later returns to the base, those remaining orders, and fresh orders from traders who recognise the area, may absorb selling pressure and cause price to rise again.
For example, if GBP/USD previously rallied from a demand zone between 1.3220 and 1.3240, a return to that area may attract buyers. A bullish reaction is more convincing if the return also sweeps sell-side liquidity below an earlier low and then closes back above the zone.
A zone tells you where a reaction is more likely, not whether that reaction will become a reversal or a continuation. I never treat the rectangle itself as an entry signal; the useful information comes from how price closes after it reaches the area.
Once liquidity zones have been drawn and confirmed, trading them becomes a repeatable four-step process. The word “profit” should always be understood in terms of probability and risk control; no zone guarantees a profitable outcome.
The first two steps represent alternative scenarios:
The closing price after the zone is tested determines which route to follow.
Fading a liquidity sweep means trading against the initial move after price pierces a zone and then closes back outside it. The move into the zone activates clustered stops and breakout orders, but the rejection suggests that the new buying or selling pressure has been absorbed.
The important word here is after. Do not enter simply because price has touched or pierced the rectangle.
Before the candle closes, there is no reliable way to know whether you are watching a temporary sweep or the start of a genuine breakout. Entering on the first spike is effectively asking the market to reveal the ending while it is still halfway through the story.
A basic bearish sweep setup follows this sequence:
Illustrative EUR/USD sweep trade
A liquidity zone is drawn above a previous high from 1.1474 to 1.1486. EUR/USD moves into the zone, spikes to 1.1482 and triggers buy-side orders, but the candle closes back below the zone at 1.1470.
A trader enters short at 1.1468 and places the stop at 1.1490, four pips beyond the upper boundary. The total risk is 22 pips.
The opposite liquidity zone is positioned at 1.1424, creating a 44-pip potential target. This produces an approximate reward-to-risk ratio of 2:1 before spreads and slippage are considered.
These figures are illustrative and do not represent a recommendation or guaranteed result.
The bullish version is the mirror image. Price sweeps below a previous low, activates sell-side orders and then closes back above the liquidity zone. A long trade is considered only after that rejection becomes visible.
If price closes beyond the zone and continues to hold there, the fade idea is invalid. That is no longer a confirmed rejection, so move to the continuation playbook.
Read more: Liquidity Sweep: How It Works and How to Trade It
A liquidity-zone continuation occurs when price clears the zone, closes beyond it and maintains acceptance on the other side. Rather than reversing, the activated orders add momentum to the existing move.
The safer approach is not to chase the first candle through the area. Wait for price to return and test the broken zone from the opposite side.
For a bullish continuation:
For a bearish continuation, reverse the process.
Suppose EUR/USD closes above the earlier zone at 1.1486 and later pulls back to 1.1488. If the retest produces bullish rejection and remains above the boundary, the old liquidity zone may act as a launch point for continuation towards the next pool of orders.
I paid enough tuition to the market in my earlier years by chasing large breakout candles. A 25-pip candle through a zone can look wonderfully convincing, but entering near its top often means buying just as the market begins its retest. Waiting for the return may result in fewer trades, but it usually provides a clearer invalidation level and a more sensible stop.
The highest-confluence bullish setup occurs when a sell-side liquidity sweep finishes inside a fresh demand zone. Stops below an obvious low are triggered at the same price area from which a strong bullish move previously launched.
This brings two independent ideas together:
Imagine GBP/USD has equal lows at 1.3242, with a fresh demand zone extending from 1.3220 to 1.3240. Price falls below the equal lows, trades into the demand zone and reaches 1.3230 before closing back above 1.3242.
The move has swept sell-side orders below the lows while testing the bullish origin area. If the rejection is confirmed, a trader may consider a long entry with the stop beyond the demand-zone boundary and the target near the next visible high.
The bearish mirror applies when price sweeps buy-side liquidity above a high and enters a fresh supply zone. A confirmed close back below the area may support a short setup.
Task |
Use the liquidity zone |
Use the demand zone |
|---|---|---|
| Set the bias | Observe whether sell-side or buy-side orders are swept and how price closes afterwards | Check whether the zone supports a bullish reaction; use a supply zone for the bearish mirror |
| Time the entry | Wait for the sweep and confirmed reclaim rather than entering on the initial pierce | Refine the entry around the base after rejection appears |
| Place the stop | Account for the liquidity boundary so the stop is not left inside the sweep area | Place the stop beyond the structural edge of the demand zone with a suitable buffer |
| Set the target | Target the next opposing liquidity zone or obvious order pool | Use the demand zone for the entry structure rather than the main profit target |
| Confirm the setup | Look for a strong reclaiming close, long wick or failure to hold beyond the level | Prefer a fresh zone with a sharp departure and few previous retests |
The liquidity zone helps establish the likely order sweep and target, while the demand zone anchors the entry and stop. They are two layers of one trading process rather than competing tools.
A promising setup can still produce a poor trade if the stop, target or position size is improvised. Finish every liquidity-zone trade with the same risk process.
Entry, stop and target should all share the same structural reference frame. That consistency is why drawing the liquidity zones properly is worth the time.
Read more: What is a stop-loss order and how to set it
Liquidity-zone trading has genuine limitations, and understanding where it can fail is just as important as knowing how to use it. The rectangles may make a chart look organised, but the market is under no obligation to respect our stationery.
None of these limitations is solved by believing in the setup more enthusiastically. The practical response is to wait for the closing candle, demand confluence, respect the higher-timeframe direction and cap the amount at risk.
I treat liquidity zones as a filter that improves my decision-making, not as a crystal ball. They tell me where to wait and pay attention; they never guarantee that a reversal is due.
Liquidity zones are price areas where stop-losses, pending orders and breakout entries cluster. They commonly form beyond previous highs and lows, equal highs or lows, session extremes and round numbers, which can draw price towards the waiting orders.
A demand zone is the consolidation base from which a strong bullish move launched, potentially leaving unfilled or renewed buying interest behind. Price may produce a buying reaction on its first return, while a supply zone represents the bearish equivalent.
A liquidity zone marks where orders cluster and price may be drawn, making it a potential target. A demand zone marks where a bullish move originated and may produce a reaction when revisited; the setup becomes stronger when a liquidity sweep occurs inside a fresh demand zone.
Traders commonly fade a liquidity sweep after price pierces the zone and closes back outside it, or trade a continuation after price clears the area, holds beyond it and successfully retests the boundary. Stops are normally placed beyond the structural edge, with the opposite liquidity zone used as a potential target.
No. An order block generally refers to the final opposing candle or compact price area before an impulsive move, while a liquidity zone is a wider band where clustered orders are expected. They can work together, with the liquidity zone providing context and the order block helping refine an entry.
Both types of zone form on every timeframe, but higher-timeframe zones tend to carry more weight. A common workflow is to draw the main areas on the daily and four-hour charts, then use the one-hour, 15-minute or lower chart to assess the reaction and plan an entry.
The width should come from chart structure rather than guesswork. When price is below the reference area, box from its highest close to its highest wick; when price is above, mirror the rule by boxing from the lowest wick to the lowest close.
Once a liquidity zone has been swept, some of its resting orders have been filled and its immediate strength is likely to decline. An obvious level can refill as traders place new stops and entries there, so demote it to a watchlist after the sweep and promote it again only if fresh reactions and order clustering develop.
Liquidity zones mark areas where price is likely to be drawn because stop-losses, breakout entries and pending orders are clustered there. Demand zones mark the consolidation bases from which strong bullish moves previously launched.
The distinction is straightforward: liquidity zones are targets, while demand zones are origins.
Drawing liquidity zones can also follow a structured process:
Once price reaches a zone, the closing candle becomes the deciding factor. A sweep followed by a close back outside the area may support a reversal trade. A decisive close beyond the zone, followed by a successful retest, may favour continuation instead.
The strongest setup discussed in this guide occurs when a liquidity sweep finishes inside a fresh demand zone. The liquidity pool explains why price was drawn into the area, while the demand zone provides an independent reason for buying pressure to appear. Stops can then be placed beyond the structural boundary, with the opposite liquidity zone used as a logical potential target.
After years of watching price reach the “perfect” level and then behave in a thoroughly imperfect manner, my view is quite plain: liquidity zones do not predict direction. They show where the crowd’s stops and pending orders are likely to be waiting.
The real information arrives after those orders have been activated. A close back outside the zone points towards possible rejection; holding beyond it points towards possible continuation. Nothing before that close needs to be traded.
Lee W. is a seasoned professional trader with over 10 years of experience. Passionate about sharing valuable expertise and unique market insights, Lee W. now serves as an external and independent market analyst for RADEX MARKETS.
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