I know this thread is three years old, but it has some recent activity, so . . . here.
As a public service for future generations, here is the OP schematic redrawn for clarity. The structure of the circuit is fine. It is not clear why the LED resistors are split into two resistors with the bypass transistor connected in the middle. The circuit would work fine and have much less power dissipation if the bypass transistor were connected directly to the LED anode, and the two resistors combined into a single 300 ohm part.
Operation is straightforward. Each switch closes successively as the water level rises. As each switch closes, one transistor lights its own LED and another transistor bypasses the previous stage's LED, turning it off.
![enter image description here](https://cdn.statically.io/img/i.sstatic.net/7uoLl.gif)
Each switch represents two probe wires maybe 1/2" apart. When water rises to their level, it appears as a resistance between the probe wires. The only real problem with this circuit is that water resistance is too high to drive a bipolar transistor, let alone two in parallel. To barely saturate both transistors would require a water resistance of 18K or less, while real water could be several hundred K.
Using a second transistor to inhibit the previous stage LED rather than the previous stage driver works well, and is in fact less complex that using steering diodes.
As above, the only real problem is the inadequate drive current caused by the high resistance water. A solution is to change the transistors to small-signal n-channel MOSFETs. Here is a reworked schematic with FETs. This version also replaces the bypass transistors with diodes. A diode is able to bypass an LED because while the LED's forward voltage (Vf) is around 2 V or more, a signal diode Vf is around 0.7 V. The diode clamps the LED's anode at a voltage too low for it to conduct and illuminate.
With this approach, even a water resistance of 1 M would still present a gate voltage of 6 V, more than enough to "saturate" (fully enhance) the FET.
![enter image description here](https://cdn.statically.io/img/i.sstatic.net/BQ6jH.gif)