An area on the chart where a high concentration of stop losses and pending orders reside.
Liquidity pools form at obvious technical levels — above swing highs, below swing lows, at round numbers, and near trendlines. These are areas where retail traders place their stop losses and pending orders. The denser the cluster of orders, the more attractive the level is to institutional traders who need that liquidity to fill large positions.
Price is attracted to liquidity. Understanding where liquidity pools exist helps you predict where price is likely to move next and where stop hunts may occur. It also helps you place your stop losses in less obvious locations to avoid being swept.
A stock has three equal lows at $45.00. Thousands of traders have their stops just below at $44.90–$44.95. This creates a large liquidity pool. Institutional traders are incentivized to push price into this zone to fill orders before reversing.
Three equal lows create a liquidity pool below — stop losses cluster just beneath, attracting price to that zone.