In contrast with Wyckoff’s Theory
The term Smart Money was first introduced and mentioned by Richard D. Wyckoff, a renowned stock market authority, trader, and educator who contributed significantly to the field of technical analysis. He is known for his work on the Wyckoff Method, which aims to reveal the intentions of "smart money" in the market. In Wyckoff's framework, "smart money" refers to large, well-informed investors, institutions, and professionals who have the financial capacity and knowledge to move markets strategically. Wyckoff's analysis seeks to detect the footprints of smart money through price and volume analysis, enabling traders to make more informed decisions based on the actions of these influential market participants. In essence, Wyckoff's concept of smart money revolves around understanding the behaviour and motives of key players to gain a competitive edge in trading and investing.
When we closely study Wyckoff’s price cycle, we can see that in each cycle whether it is accumulation or distribution, some points are similar to the points laid out in the SMC.
The Wyckoff Price Cycle consists of four main phases:
Accumulation
In this phase, informed investors (smart money) are quietly accumulating positions while the general public is still bearish or unaware of the potential upward movement. Prices may trade within a range, and volume tends to be low. The goal is to accumulate a substantial position without causing noticeable price increases.
Markup (Advancing or Bullish Phase)
After accumulating a significant position, smart money starts to push prices higher. This phase is characterized by a strong uptrend, increasing volume, and positive sentiment. The public begins to notice the price movement and may start entering the market.
Distribution
During the distribution phase, smart money players begin to sell their accumulated positions to the less-informed public. Prices may trade within a range or show signs of weakness. Volume might start to decline as the market loses momentum. This phase is marked by a shift from bullish sentiment to uncertainty or bearishness.
Markdown (Declining or Bearish Phase)
In the markdown phase, prices decline, and the market enters a downtrend. Volume may increase, reflecting increased selling pressure. The public sentiment turns increasingly bearish as losses accumulate.
In conclusion, Smart Money Concepts (SMC) provides traders with a strategic framework that focuses on understanding the actions and motives of market makers, particularly institutions such as banks and hedge funds. This approach involves replicating the trading behaviour of influential entities, focusing on variables such as supply, demand dynamics, and the structural aspects of the market.
SMC introduces specific terminology, including Order Blocks, Fair Value Gaps, and Liquidity, which are key elements in analyzing market movements. These concepts align with traditional trading ideas and contribute to a deeper understanding of market dynamics.
The emphasis on the "break of structure" (BOS) is a fundamental aspect of SMC market analysis, where each break signifies a change in the market's behaviour. SMC traders leverage their understanding of these patterns to make informed decisions based on market dynamics.
Comparatively, the origins of the Smart Money Concepts can be traced back to Richard D. Wyckoff, a renowned stock market authority. Wyckoff's work on the Wyckoff Method emphasizes understanding the intentions of "smart money" in the market through price and volume analysis. His concept of smart money aligns with SMC, and the Wyckoff Price Cycle illustrates similar phases of accumulation, markup, distribution, and markdown.
Essentially, both SMC and the Wyckoff Method provide traders with valuable insights into market dynamics, helping them make informed decisions based on the actions of well-informed investors and institutions. Understanding these concepts and their applications can contribute to a more comprehensive and strategic approach to trading and investing.