• Jan

Trading the clearout

Updated: May 9





Before diving into trading the clearout, let's break down some basics of why this pattern exists and how liquidity is positioned around the clearout price structure and why it makes sense for market makers to use this pattern to extract the liquidity from the market and position their own orders into those liquidations extremes.


Price tends to move from structure to structure, squeezing one side of the market participants most of the time. Rewarding one side of the market, while punishing the opposite side of market participants. Liquidation events are constant processes that move markets intra-day.


The larger the liquidity zone buildup, the more likely it is that such zone will be targeted by the market maker, especially if it is counter trend structural setup. Often clearouts will form against the main trend, for example, an extended bearish trend, structural consolidation, and then clear out of lows and complete reversal upwards. That is how the clearout is initiated (and vice versa for bearish setup). This is often common in very liquid markets such as FX or large-cap equities that trade on strong volume. In small-cap equities and crypto, clearout is often formed against most retail volume participation, which is respective to the short side for the first market and long side for the second market. However, the main rule still applies that many clearouts will be formed against the overall trend direction or against overall retail trader participation.


Below is the conceptual presentation of how liquidity is often positioned around structures in the market. Many traders will use the same price levels to place their entries or exits at, but more frequently, the exits or stop losses.




To understand why the market maker might trigger liquidation/clearout intentionally, it is important to understand the above concept of fuel zones. This is not a conspiracy theory of any sort, it is the means of how larger players might want to use high liquidity zones to put their own large orders in without having too much impact on the price.

Larger players often cannot trade the same as the retail trader does because, in low liquidity price areas, they might push price too much with large orders and have a bad overall average on fills or have to fill a large number of orders with market orders since there is not enough limit book liquidity to fill them in. But that is not always the case as some market-making activity is actually created to push the price; both sides of the coin are present.


One critical concept to note for clearout play is the consistency of structural symmetry, by far the most important concept when it comes to clearout. The majority of targeted clearouts will happen around structures where the price is consistently bouncing from demand/support level or resistance/supply level for multiple times before it actually breaches it, thus traders should only focus on such structures to identify and trade clearouts. The more bounces in structure, the better.



Micro play



It should be noted that clearout is just a micro play, there should be additional variables stacked before the trader should consider trading it. For example, using catalysts in Forex, usually, best A grade clearouts will be ahead of PMI/CB/NFP news where MM will remove certain liquidity to fill his orders ahead of news into clearout. Or in small-cap stocks might be when stock is trading on heavy volume and is manipulated; those sort of variables should be additionally stacked before considering the trading micro play of clearout. Always set a micro play in the correct macro environment to refine the play with a higher probability of working.



Limit order stacks, stop losses, and breakout orders



Conceptual presentation of limit order liquidity and the impact of structural symmetry / consolidation on it. As time passes and if the price cannot break dense highs or lows, chances are the liquidity around those price levels will increase with time. The more time it passes, the more the liquidity will increase (if major highs/lows do not break), the more juice for MM (market maker) to push for clearout liquidation.

Because of this factor, if a trader wants to trade the clearout pattern, he/she should be always aware of how time plays the role in consolidating the orders above/under key liquidity fuel zones. Let the structure develop with as lengthy consolidation as possible since in such case it is more likely that there is a strong cluster of liquidity sitting for clearout to take place.






A clearout is a liquidation event where the stop losses of buyers or sellers are taken out, and the breakout traders are trapped in. Clearout and stuff both are similar concepts, but stuff can happen around any price or no structure at all, while clearout will 90% of the time happen around dense price structures only (multiple bounces with dense supply or demand).

If the big buyer wants to fill in size without slippage and large price impact, then that might be done where other buyers are liquidated and cleared out of positions so that they turn into sellers (long trader when exits position turns into selling long order), which allows the large buyer to swallow up their sell orders and fill long with minimal price impact (or the other side for short selling clearout on cover liquidation).

Clearouts are most common around clean symmetrical structures where many traders will watch the same price level or place SLs (stop losses) around the same price level. Therefore a huge buyer or seller would want to see that level broken for liquidation event to happen and push his position in while liquidation is taking place and absorb/fill into opposite orders.


Below is a conceptual example of how often liquidity is positioned around structure where MM triggers clearout, it does not, however, mean that in every random structure with few bounces, that is how liquidity will position. This is more about average process occourance rather than being a law of physics that holds true every single time.


For retail traders, the aim should be to spot such potential plays and join the game of MM (market maker) and avoid being a liquidity target. Clearout should always present itself with a rapid, strong reversal move after critical lows/highs get taken out—basically a rapid rotation of price back into the structural support. The speed of rotation back will usually depend on the market or the liquidity of the assets. In rigged micro float stocks, the rotation back might take 10-15 minutes as MM rigger needs to collect as many covers as possible over time, while in FX or crypto, the rotations will be much quicker on average (1-3 min) since those markets are much more liquid. But on average it can vary a lot, the market maker will take the opportunity when presented and unload his position at clearout as soon as strong enough orders start to position themselves in limit books, so the average response of rotation on clearout will depend on how quickly those big orders show up at the critical location of a clearout.

If the structure is not even on highs or lows positioning (for example, highs or lows being connected to trendline instead of flat line), then the main area to watch is the lowest low or highest high of structure, that is where the majority of condensed stop losses will sit and where breakout traders might initiate.



The example below indifference of flat vs. trendlined positioning of lows and the importance of deepest low (LOD). No matter how the structure is positioned, the low of the day (LOD) will be the key level that the market maker will want to clear out and where the majority of stops will likely sit.



Below is difference between targeted and non-targeted clearout (triggered by the market maker or triggered by overall market action and cascade flows):




Small-cap stocks


The majority of clearout examples in this article are for the long side (crypto, FX and large-cap equities), for small-cap equities, clearout is explained for specific Type 1 and Type 4 short trap under the article "Short traps on rigged stocks." But non the less the main variables and rules are all the same.



Markets


Clearout liquidations are present across all markets but especially common in the most liquid markets, such as FX currencies, large-cap equities (MSFT, NFLX, AMZN...), microfloat stocks, and Bitcoin.



Timing


After clearout the candle under all structural lows or above highs, the price should start rotating back inside the structure relatively quickly. Timing is the key, it should not take more than 10X 1 minute candles (if using 1 minute chart) for the price to rotate back above support (if it's an M1 structural pattern). This, on average, depends a lot on how big the structure is, how many candles are in each leg of the structure, the more candles per leg, the longer it might take for clearout reversal move to happen, but it should not be more than 10 candles. In best plays, it happens within the first 3 M1 candles. Again it is relative concept as it scales with the time frame chosen, on higher time frames the same candle number concept applies, just the amount of minutes increases by the X amount of time frame selected (for example by factor of 15 if 15 minute time frame is chosen).


Hunting procedure




To trade clearouts, a trader needs a solid routine to find the patterns and have an alert using the methodology to support the searching process. Without using price alerts and without knowing ahead what to look for, it will be difficult to execute those plays. One should research them historically to know what to look for and then support the live trading approach with an alert setting routine to focus attention only at specific price levels.



1. Alerts


Once the potential symmetric structure is spotted (with variables that fit potential clearout attempt), a trader should place an alert below the structural lows (or above highs depending if it's a bull or bear pattern). This is critical as once an alert is placed, generally, traders can take eyes of assets and only pop them back once the alert rings and the price clears the required liquidity area, at which it could become potential clearout play. Using alerts is critical to minimize the requirements of watching the asset (basically less screen time) and to be more patient and "fresh" as a trader.



2. Tape / order book / Bookmap / volume


The key to focus on is volume. At the clearout price area, there should be significant volume traded. For FX, using futures volume, data should be used, while for equities, all platforms or brokers are equipped with real volume data.

For crypto, Binance is very good because many large-sized traders and market makers use it, which provides reliable volume prints compared to the overall market (since crypto exchanges are decentralized it is important to use the biggest exchanges for volume read).


Below conceptual example of where the very high volume should be traded on clearout.








Targeted clearout in bullish structure (FX and large caps)




Above is the conceptual presentation of the LOD (low of the day) type of clearout pattern and its structural composition, below on images are two examples of structural clearout with higher (or even) lows and higher highs in the structure. Drop into the lows will usually be initiated by the market maker with heavy market order that will remove liquidity on bid side and swipe price under lows, liquidating stop losses of buyers. For entry, a trader should wait for clearout liquidation and then for the price to start curling back above support for a long entry. Risk should be the lowest low of clearout break-down. But for traders who can read Level 2 order flow well, there are many different better low-risk combinations to handle the risk on play with smaller stop loss.


The key is to know which setup to pick and remove from trading (only trade targeted clearouts). Two variables would qualify as valid play (either of them alone or both together):


1.Targeted clearout on quick flush under lows, strong move (1 or 2 M1 candles, for example) into the LOD.


2.Slower move with very high volume under the lows (SL clearout).


For Forex to access futures volume data, one can subscribe to any broker providing futures data. That way, if the trader trades, for example, EURUSD in FX, then E6 futures data can be used for futures volume prints. On images below volume is not included on chart, since the price data comes from Forex and not futures broker.






Another example of LOD clearout but using futures volume data confirming the clearout (currency futures). In both examples, price rotated back into support and above within 3 M1 candles. It helps a lot to watch tape/level 2 at the clearout if there are large bulked orders coming through, chances are larger player is filling into liquidation (good for confirmation on entry.






Clearout followed by trend rotation



Often large players will use clearout liquidations to rotate trends. The clearout area allows them to fill as many larger orders at the best possible price (under lows where other traders will actually stop out their longs and sell) and then further push with buy market orders to form trend rotation. That is why the price will often break lows, rotate, and then also break the highs in the same structure and rotate the downtrend into the uptrend.


Such example on the image is the trend rotation with clearout climax as its actual bottom:




Those kinds of bottoms are especially frequent on large-cap equities, worthy market to study LOD clearouts and the bottoms formed around them.



Clearout examples:





On the image below is an example of an LOD clearout and a sharp quick rotation back inside of the structure, followed by a full bottoming of price and rally.



The example below is the case of where the LOD clearout formed around the key news catalyst present on the currency. Very often in FX markets, MMs will form those clearouts to swipe key liquidity levels just to use the stop losses of other traders to increase their position even further and then completely reverse the price. Such example below where LOD clearout is right at the news release but soon after it price completely rotates to the upside.






Example of LOD clearout with slow reclaim, those are less ideal since it is harder to tell if the price will actually push after reclaiming or not. Ideally, after LOD clearout price should reclaim key support level very fast.



Non targeted clearouts



The focus should be to trade only targeted clearouts, those where the market maker initiates them, and not the ones where general market action over time form a clearout since many non-targeted clearouts do not rotate back (and are therefore not ideal to play on the long side).

The key component for trading the clearout is that it has to reclaim the support for long play (or resistance for short play). If it does not reclaim, there is no play in the first place.

Below is an example with high volume clearout under lows as the long traders are stopped out, but the price did not reclaim the support level, thus not a long play. It was not a targeted attempt.




A grade clearout



Below is A grade setup in crypto. As Mike Bellafiore said: Proper trading setup needs variables, the more, the better. A grade play clearout on crypto will consist of those variables:


-heavy selloff ahead of structure (ideally catalyst/news)


-symmetrical structure with even lows (ensuring even SL positioning under them)


-very high volume on clearout, highest volume candle in the whole structure


-structure with progressive lower highs or even highs (not higher highs)


-volatility on the asset should be high (wide range)


-sharp and quick reversal after clearout and reclaim of key support






The amount of volume traded on clearout candle does not matter in terms of the size of contracts or shares, it only matters in relevancy to the structure. The volume on clearout should be a lot higher than the average traded volume inside the structure. One could say what matters is relative volume because sometimes good clearout play could trade on 30 Bitcoin clearout volume, while others can be at 300 Bitcoins liquidated and traded, it all depends on current average liquidity within price structure or average liquidity over the past 60 minutes traded.


On the image below is the LOD clearout where the volume traded was the highest 1-minute volume candle inside the whole price structure. The price quickly reclaimed support within the same candle and then pushed higher.


On the image under is an example of a high volume LOD clearout, where the volume (purple circle) is by far the highest volume candle/swipe in the entire structure.



Usually, the main juice of liquidity will be under the most southern / lowest low of the structure, that is where most traders will put stop-loss orders because of the psychological effect of being "the safest place to place a stop" as offers need to work harder to get that liquidity as oppose to putting order under the highest lower low. Market makers/whales know this and target those zones; 90% of clearouts will go straight through the lowest low in the structure, hence the name "LOD clearout".


Think of stop-loss positioning in this manner (some traders place stops near current low, some at mid-range, but biggest cluster of stops will sit under most obvious deepest low, usually LOD, and will be key area that MMs will target):





Below is a B grade example.



Clearout is a specific pattern that is most frequent in very liquid markets. The market type (FX, equities..etc.) does not matter, it only matters the liquidity on that day and if there is a large cluster of retailers positioned on the specific side of ticker. For example, those plays could never be present on small-cap equities for 99% of the time, but then on the day that small-cap asset trades massive volume, this pattern might be present, as it presents an opportunity for the market maker. Same with alternative crypto coins, it will not be present 99% of the time on specific crypto coin until the day arrives and asset trades on massive volume, which is when the pattern might emerge. While on assets that trade very high liquidity every day, such as Bitcoin, this pattern will be frequent and consistently present.


The faster the price reclaims support and pushes above after the clearout, the better play potentially it is. On A grade plays, price should reclaim support within 1-3 M1 candles after clearout. Bellow is B grade example, but it had quick reclaim after buyers soaked decent offers.




The volume prints on each candle will reveal when the longs will start to panic or where the actual stop losses are positioned, being patient and waiting for that high volume is key, and watching the speed of tape when offers start to flush big time. Still, the price actually starts to move up.




If the structure is not symmetric (evenly positioned lows), it is hard to base the entry, that is why the structure should be clean and symmetric. This allows precise entry conditions across all plays and the use of alerts to help with coordinating the entry. Below is an example of asymmetric structure and clearout.




The deepest lower low (often LOD) is the main play area that traders should wait for. Example bellow.




Below is another example of A-grade play, with a very symmetric structure on demand level. High volume clearout happens around 14:40 time print that is followed by fast rotation. A grade clearouts will form bottom on asset and allow the trader to scale for larger profit targets. Often traders in crypto say what the best way to buy crypto on dips is, and the circulating answer is "dollar average in every month," which is true for the quickest and least time-consuming way to go about it. But if trader/investor really wants precision and accuracy with controlled risk, then the best way to go about it is waiting for A grade clearout and only buying there while looking for a large run after clearout. It will not happen every time, it might happen only in 20% of cases, but the risk to reward is great for the plays that eventually work out. This pattern also works out well for very liquid equities (high cap) and FX assets under major macro flows—Bellow's bottoming example on Bitcoin after clearout. It should be added, that trader should only use such a method in the bull macro cycle, as in the bear market those 20% of cases that do work decently will not be able to deliver strong 10 or 20R trades because the macro supply will be against it.



The same example from above is on the image below, just with the final rally visible in a wider lens.



To anticipate the pattern, it helps to focus on assets that are "at play." Usually, assets with fresh catalysts or very hot markets such as crypto when a strong bull market is in phase. For example, when crypto markets pick a new bullish trend, traders should focus on searching for clearout patterns. Clearouts are frequent in crypto markets because a strong trending market attracts many un-experienced traders who step into margin trading, usually buying around the lows. Since they are unaware of the trap, it is relatively easy for the market maker to replay the pattern repeatedly, stopping the long traders out with clearout under lows or stuffing the clean breakout.



Clearout on small-cap stock



Below is a conceptual example of a clearout on rigged micro float stock. After HOD is taken out, often rigger will unload big size as all the liquidity is already collected. Type 1 short trap. The premise of this type of clearout is to potentially trade it short after HOD is cleared (if the price starts to form a micro shelf and does not push any higher).



Below an example of clearout on the short side for microfloat stock. Again the size of volume on clearout is not some default number, it matters relative to all the variables in context.

This clearout is more specifically explained in the article "Short traps" under Type 1 short trap.




Heavy whale washes on crypto, asymmetric clearout



This pattern is specific mostly to crypto markets. Whales often force those liquidations in powerful bull markets where whales will flush large bulked market orders on major exchanges ( 500 or 1000 BTC in bulk orders) to crush the liquidity and form a strong wash.


The main goal might be to let all chasing margin longs sell out so that whale can load back his size at a better lower average as the longs panic sells into a large drop. This is a constant practice in crypto markets, especially in liquid coins, and for some reason, it is actually legal. However, there have been cases where it has been prosecuted.

Those whale washes can be extremely aggressive, pushing the price 10-30% on coin within few minutes.


As a margin crypto trader, I believe the use of stop losses is almost a must because surprising catalysts often hit crypto markets very often. Especially if one is adding to position and holding for many days on swings.


Examples of Bitcoin below:





This pattern is much harder to anticipate because there is no real price or specific time to anticipate the pattern. From my own research on these patterns, the only variable I found to be present in most of them is a very strong bull market, but since this variable is so general and non-specific, it does not help much. Often this pattern will develop along with symmetric support/demand levels or after powerful parabolic bullish rallies.


Using emergency stop loss with 1-2% offset is a good practice, since there is no real specific variable to predict the pattern, even watching the tape does not help because those patterns emerge on surprising and quick market orders that crush the liquidity, giving trader no time to prepare ahead.


The use of hard stops (MKT stop orders) should be defined upon which market trader trades. Some markets are fine not using them in some markets, while other markets are almost a must to use. In crypto, if one is leveraged/ margin trader with more than 1:10 leverage, then SLs should be used. Otherwise, it's just a matter of time when one gets caught with pants down in a big 1 or 2k Bitcoin washout.



Orderflow example for targeted clearout on crypto



To break it down in stages, why clearouts are so frequent in crypto markets and why market makers set them there is a basic outline on a conceptual image below. Market makers target not all clearouts it could just be that market as a whole puts price there, but the focus of this article is on targeted attempts that can be revealed through specific price action, tape, size of offers, and volume. The liquidity target of MM on clearout is mostly margin / leverage-based traders in crypto since those are forced to cover/sell much sooner than the rest of crypto investors.


Conceptual example where bull legs represent macro trends (2000-4000 USD moves on BTC), choppier consolidations represent micros from M5 time frames (size of 50-100 USD).


1.Strong bull market


The first major component of increasing the chances of targeted clearout on crypto is a strong bull market. Once Bitcoin pushes, for example, from 6000 to 11000, it attracts many new margin traders, who are mostly long-biased. The data from exchanges shows that there will be a large influx of long-biased traders who are new to the game in each new strong bullish phase and usually only long. And since the majority of those traders will use LOD or lowest current low to set stop loss or to exit, it creates a predictable outcome for MM to set a trap.


2.Strong washout, then consolidation where MM starts to absorb/buy.


After an initial strong wash ahead of structure, MM might start to absorb some size by buying. It might, or it might just hold size from before higher average, this is just a guess there is no real way to prove this concept. Still, the main point is that MM should have some sized long position to flush it and create the targeted liquidation of other long traders under the lows of structure.


3.Symmetric bounces from lows


Once the symmetry starts to build up with even lows or higher lows, many long margin traders will also start to participate in expectations that this might be bottom. The more symmetric the structure, the more will use breach of lows as stop-out.


4.Clearout and reverse


Last part, MM will flush heavy sell market orders (seen on tape) to destroy bid liquidity and push the price under lows. Usually, once the lows are taken out, huge selling liquidity will hit the tape but at the same time also buying as the MM is trying to fill into offers. The best asset to watch tape around this part will be ETH, assets like XRP that have a too high supply of overall coins are harder to read on tape around clearout levels. The lower the supply of assets, the easier it will be to read the tape or say more meaningful each order passed on tape.


The basic principle of targeted clearout is the participation of retailers strongly on a certain side of the market, which MM will hunt to liquidate. Example bellow on long (crypto) and short (small-cap stocks) side.




Conclusion



Since clearout is a process of liquidation present across all markets it is well worthy for traders to get familiar with such a concept. Study it on historical charts first, get familiar with the pattern, and if possible collect a large sample base of plays and filter them by the grade of play (A vs B) and notice what commonalities the A plays share since those are the one's trader should focus on to trade them. After one does enough historical research the whole concept starts to make a lot more sense on live market action for traders to execute on.

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