Smart Money Concepts
Last updated
Last updated
The simplest way to describe Smart Money Concepts trading is to say it is price action by a different name.
SMC uses classic concepts like supply and demand, price patterns, and support and resistance to trade, but everything has been given new names and described differently.
SMC traders refer to "liquidity grabs" and "mitigation blocks." While their terminology may sound foreign, when you examine SMC, you will realize it is a more traditional trading approach than it appears at a glance.
SMC is not just a trading strategy but an entire philosophy about the market's work.
SMC states that market makers (i.e., banks, hedge funds, etc.) are manipulative entities and that, moreover, they are actively making life difficult for retail traders.
According to SMC, as a retail trader, you should base your strategy on what is happening with the "smart money" (i.e., the money belonging to market makers).
Indeed, you should try and pattern your trading off of how these market makers are trading. They are concerned with supply, demand, and market structure. So, as an SMC trader, that is also what you are looking at when making your own trade decisions.
SMC sounds highly technical when you first start reading about it. You may find yourself scratching your head at the basic vocabulary.
You need to understand the smart money trading Concepts first because these concepts are the foundation of this trading system and success depends on applying them correctly on the chart
Supply or demand is a Zone where price rapidly pushes away, creating inefficiency and a break of structure or character change.
There are three factors to consider when identifying supply and demand areas for trading.
Inefficiency occurs when we have gaps between the candles, and when it happens price is more likely to come back to this area to fill the gap.
a break of structure is formed in a trend continuation every time price breaks a structure level in the same Trend Direction it signals a trend continuation
on the contrary when a price breaks a structure level in the opposite direction we call that a change of character which signals a possible trend change.
Change of character supply and demand, zones are most effective when they break through two or more supply and demand zones change of character forms after a higher time frame mitigation price impulsively breaks through the zones with a few large candles
If smart money wants to buy a large number of currency pairs it will need sellers in the market the existing conditions to place these positions are called liquidity
so imagine that we are in an uptrend and if banks want to buy this currency logically they need many sellers but since we are in an uptrend everyone is looking to buy so let's suppose that price makes support before reaching the demand Zone so this support will be an interesting area to place by orders for support and resistance Traders and guess what type of orders are their stop losses - sell orders
Now smart money can grab the sell orders and place their buying positions
Order blocks are optimized supply and demand zones we consider the last recent candle that created the inefficiency as an order block Zone regardless of being bearish or bullish but we have three rules for a valid order block first it must have inefficiency second it should lead to a break of structure or a change of character third it must be unmitigated means that it has not been tested by the price yet since order blocks are one-time use we don't consider trading mitigated order blocks here is an important point in two conditions we use Wix as order blocks first when the shadow of the order block candle is bigger than the rest of the candle second when the shadow of the following candle grabs the orders
We have three rules for a valid order block first it must have inefficiency second it should lead to a break of structure or a change of character third it must be unmitigated means that it has not been tested by the price yet since order blocks are one-time use we don't consider trading mitigated order blocks
In two conditions we use Wix as order blocks first when the shadow of the order block candle is bigger than the rest of the candle and second when the shadow of the following candle grabs the orders
Now let's have an example to explain how to establish which site is in control look at this example
Imagine this is a four-hour structure and we can clearly see that we are in a downtrend so Supply is in control, although we have a short-term uptrend as long as we stay below the four-hour Supply Zone we have a bearish bias.
If we break the major four-hour Supply Zone we can establish the demand takes control and as long as we stay above the major demand zones we have a bullish bias but if we break the demand Zone to the downside we can establish uptrend is over and Supply takes control.
Order blocks
Fair value gaps
Breaker blocks
Mitigation blocks
Liquidity void
Rejection Block
Old High Old Low
