How to trade Turtle Soups (Liquidity Sweeps)

Summary

This video script delves into the concept of 'liquidity sweep' or 'turtle soup' in trading, a strategy often misunderstood by traders. It explains the origins from the 'Turtle Traders' and their trend-following methods, highlighting the difference between a 'liquidity sweep' and a 'liquidity run'. The script teaches how to identify and trade these patterns, emphasizing the importance of understanding market liquidity, swing points, and the impact of large entities on price movements. It also introduces the idea of 'previous candle high and low' in the context of order flow and candle science, urging viewers to study these patterns through case studies for a deeper understanding.

Takeaways

• 📈 The concept of 'liquidity sweep' or 'turtle soup' is a trading strategy used to capitalize on market movements, particularly by trend traders known as 'Turtle Traders'.
• 📚 The origin of 'turtle soup' is explained in 'The Complete Turtle Trader' book, which is recommended for further reading on the subject.
• 🦆 Turtle Traders focus on trends and use breakout trading strategies, placing buy stops above recent highs and stop losses below recent lows.
• 🔄 A liquidity sweep occurs when the market trades above a high but then immediately reverses direction, causing a drawdown for breakout traders who placed their stop losses below the recent low.
• 🏁 The difference between a 'liquidity sweep' and a 'liquidity run' is based on whether the market continues in the same direction after trading above a swing high or low.
• 💧 'Liquidity' in trading refers to swing points, which are areas of the market where there is significant buying or selling interest.
• 🔄 Understanding the market's comfort above a high or below a low is crucial for identifying potential liquidity sweeps and runs.
• 🚀 Large entities in the market require sufficient opposing liquidity to execute their large orders, which can lead to liquidity sweeps when they take profits or stop losses are triggered.
• 📊 The script emphasizes the importance of analyzing higher time frames for identifying significant trends and potential liquidity events.
• 🕊️ 'Candle science sweeps' are similar to order flow sweeps but observed on different time frames, highlighting the fractal nature of market movements.
• 📝 The script encourages traders to conduct case studies on order flow sweeps in trends and candle science sweeps to better understand and identify these patterns.

Q & A

What is the concept of 'liquidity sweep' or 'turtle soup' in trading?

The 'liquidity sweep' or 'turtle soup' refers to a trading scenario where a market breaks a trend line, often a high, but instead of continuing in the direction of the breakout, it reverses immediately, causing a stop-loss trigger for trend-following traders, leading to a rapid move in the opposite direction.

What is the origin of the term 'turtle soup'?

The term 'turtle soup' originates from 'Turtle Traders,' who are known for trend-following strategies. When these traders are taken out of the market due to a false breakout, it is metaphorically referred to as making 'turtle soup.'

Why are Turtle Traders susceptible to 'turtle soup' scenarios?

Turtle Traders are susceptible to 'turtle soup' because they use breakout trading strategies, placing buy stops above recent highs and stop-losses below recent lows. When the market breaks above a high but then reverses, it can quickly trigger their stop-losses, causing a short-term price drop.

What is the difference between a 'liquidity sweep' and a 'liquidity run'?

A 'liquidity sweep' occurs when the market trades above a swing high or below a swing low and then immediately reverses direction. A 'liquidity run', on the other hand, is when the market continues in the same direction after trading above a swing high or below a swing low, indicating a strong trend continuation.

How do large entities in the market use 'liquidity sweeps' to their advantage?

Large entities use 'liquidity sweeps' by placing large orders that require significant opposing liquidity. When breakout traders enter the market with buy stops, these large entities can sell to them, anticipating a sweep that will trigger the traders' stop-losses, allowing the large entities to take profits.

What is the significance of 'swing points' in the context of 'liquidity sweeps'?

Swing points, which include swing highs and swing lows, are significant in 'liquidity sweeps' because they represent potential reversal points in the market. Traders often place their stop-losses near these points, making them key levels for potential sweeps.

How can understanding 'liquidity sweeps' improve a trader's strategy?

Understanding 'liquidity sweeps' can help a trader anticipate potential market reversals following a breakout. This knowledge can be used to adjust entry and exit strategies, manage risk more effectively, and potentially capitalize on the rapid price movements that occur during a sweep.

What is the role of 'previous candle high' and 'previous candle low' in candle science?

In candle science, the 'previous candle high' and 'previous candle low' are used to identify potential areas of price rejection or continuation. These levels can indicate where the market may find support or resistance, which can be crucial for understanding the direction of future price movements.

How can a trader identify an 'order flow sweep'?

An 'order flow sweep' can be identified when the market creates a fair value gap or area but fails to continue in the expected direction, leaving behind a swing low or high. Traders can then look for a subsequent move that 'sweeps' through this level, indicating a potential reversal.

What is the importance of 'fair value gaps' and 'fair value areas' in trading?

Fair value gaps and areas are important in trading as they represent significant price levels where the market may find support or resistance. Once these levels are traded into, they can be used as reference points for future price action, including potential sweeps or runs.

How can a trader differentiate between a 'liquidity sweep' and a 'liquidity run' using technical analysis?

A trader can differentiate between a 'liquidity sweep' and a 'liquidity run' by observing the market's behavior after trading through a swing high or low. A 'sweep' will show immediate price reversal, while a 'run' will show continued movement in the direction of the trend.