What is liquidity in trading?

In general finance, liquidity describes how easily you can trade something. A market with many buyers and sellers is liquid: you can trade a reasonable size without pushing the price much. Major currency pairs are generally considered very liquid, while small, thinly traded assets are not.

In smart money concepts, the word is used more specifically: clusters of resting orders. Think of the stop-loss orders many traders place just below an obvious swing low, or just above an obvious swing high. Traders in this community call the areas where those orders pile up "liquidity pools".

Orders sitting above a high are often called buy-side liquidity (stop-losses of short sellers and breakout buy orders). Orders sitting below a low are called sell-side liquidity. A "liquidity sweep" is when price briefly trades through such a level and then moves back, which some traders read as a sign that those resting orders were absorbed.

This is one interpretation of price action, not a guarantee. A level that gets swept can just as easily lead to a continued breakout. What you practice is reading the context and having a plan for both outcomes.