Post-Liquidity Grab FVG Entries: Capitalizing on Stop Hunts

Setup Description

This is an advanced, counter-trend strategy that aims to capitalize on liquidity grabs, also known as stop hunts. A liquidity grab occurs when the price makes a sharp move to take out a key level of stops, only to quickly reverse in the opposite direction. These moves are often orchestrated by institutional traders to accumulate a large position at a favorable price. This strategy focuses on identifying Fair Value Gaps (FVGs) that form in the immediate aftermath of a liquidity grab, providing a high-probability entry to trade the reversal.

The core idea is that a liquidity grab is a sign of a major shift in the market. The sharp reversal after the stop hunt indicates that the institutional players are now in control and are driving the price in the opposite direction. The FVG that forms on the reversal provides a precise entry to join the move. This is a high-risk, high-reward strategy that requires a deep understanding of market microstructure.

Entry Rules

Long Entry:

1. Identify a key support level on the 5-minute or 15-minute chart.
2. Wait for the price to make a sharp move below the support level, taking out the stops.
3. Look for a sharp reversal and a bullish FVG to form above the support level.
4. The entry is triggered when the price retraces into the FVG.
5. A limit order is placed within the FVG.

Short Entry:

1. Identify a key resistance level on the 5-minute or 15-minute chart.
2. Wait for the price to make a sharp move above the resistance level, taking out the stops.
3. Look for a sharp reversal and a bearish FVG to form below the resistance level.
4. The entry is triggered when the price retraces into the FVG.
5. A limit order is placed within the FVG.

Example: Long Entry on SPY

The SPDR S&P 500 ETF Trust (SPY) has a key support level at $500. The price makes a sharp move down to $499, taking out the stops below $500. The price then quickly reverses and forms a bullish FVG between $500.50 and $501.00. The price retraces to $500.75, and a long entry is taken.

Exit Rules

Profit Target:

• The primary profit target is the next significant resistance level (for longs) or support level (for shorts).
• A secondary target can be a 2R or 3R multiple of the initial risk.

Stop Loss:

• The stop loss is placed just below the low of the liquidity grab for a long trade, or just above the high of the liquidity grab for a short trade.

Profit Target Placement

Profit target placement for this strategy should be based on key support and resistance levels. The next significant level is the most logical target, as it represents the next area where the price is likely to react. You can also use a fixed risk-to-reward ratio, such as 2R or 3R, as a profit target.

Stop Loss Placement

The stop loss for this setup should be placed at the point of invalidation, which is the extreme of the liquidity grab. A break of this level would indicate that the reversal has failed and that the trade should be exited. This placement provides a clear and logical point to exit the trade if the setup fails.

Risk Control

• Max Risk Per Trade: Limit your risk to 1% of your trading capital per trade.
• Confirmation: Wait for a clear reversal candle, such as a bullish or bearish engulfing candle, before entering.
• Volume: Look for a spike in volume on the liquidity grab, followed by a decrease in volume on the retracement.

Money Management

Position Sizing:

Use the standard position sizing formula, ensuring that your risk is in line with your overall risk management plan.

Scaling In/Out:

• Scaling In: Not recommended.
• Scaling Out: Consider taking partial profits at a key level and moving your stop to breakeven.

Edge Definition

The edge of this strategy comes from the ability to identify and trade the institutional activity of stop hunting. By waiting for a liquidity grab and then entering on the reversal, we are able to trade in the direction of the smart money. The FVG provides a precise entry point, while the stop hunt provides the broader market context. This is a effective combination that can lead to high-probability trades with a favorable risk-to-reward ratio.

• Win Rate Expectation: This setup can achieve a win rate of 50-60%.
• Profit Factor: The expected profit factor is between 2.0 and 3.0.