How to trade Smart Money Concepts (SMC)This trading strategy was initially popularized by an infamous trader who is also the founder of the Inner Circle Trading (ICT) method which is claimed to be the evolved version of the SMC. Let’s first take a look at the building blocks of this trading strategy and compare it with the well-known trading concepts by industrial titans (Dow, Wyckoff, Elliott).
Essentially, SMC puts forth the notion that market makers, including institutions like banks and hedge funds, play a deliberate role in complicating trading endeavours for retail traders. Under the Smart Money Concepts framework, retail traders are advised to construct their strategies around the activities of the "smart money," denoting the capital controlled by these market makers.
The core concept involves replicating the trading behaviour of these influential entities, with a specific focus on variables such as supply, demand dynamics, and the structural aspects of the market. Therefore, as an SMC trader, you'll meticulously examine these elements when making trading decisions, aligning your approach with the sophisticated techniques of prominent market figures. By embracing this perspective and closely monitoring the actions of market makers, SMC traders endeavour to establish an advantageous position in their trading activities, aiming to capitalise on market movements driven by smart money.
When you initially dive into the Smart Money Concepts (SMC), the technical vocabulary can be a bit overwhelming. To help demystify it, here's an overview of some common terms used by SMC traders.
1. Order Blocks
These are used to discuss supply and demand. Some SMC traders consider order blocks as a more refined concept than standard supply and demand, although not everyone agrees on this.
An order block signifies a concentrated area of limit orders awaiting execution, identified on a chart by analysing past price movements for significant shifts. These zones serve as pivotal points in price action trading, influencing the market's future direction. When a multitude of buy or sell orders cluster at a specific price level, it establishes a robust support or resistance, capable of absorbing pressure and triggering price reversals or consolidation.
2.Fair Value Gap
You should clarify whether your current trading style suits you. If you don't have time to look at charts during the day, you should not focus your strategy on intraday trading using 1
5-minute or 30-minute charts. It is definitely better to develop an approach that works on a 4-hour or daily chart so that you have enough time to analyze the charts before or after work.
Ideal time and timeframe
This phrase describes an imbalance in the market. It occurs when the price departs from a specific level with limited trading activity, resulting in one-directional price movement.
In the case of a bearish trend, the Fair Value Gap represents the price range between the low of the previous candle and the high of the following candle. This area reveals a discrepancy in the market, which may indicate a potential trading opportunity. The same principle applies to a bullish trend but with the opposite conditions.
3.Liquidity
Liquidity plays a pivotal role in SMC. It pertains to price levels where orders accumulate, rendering an asset class "liquid." Essentially, these are price points with available orders ready for transactions. Liquidity can manifest in various forms, such as highs and lows or trend line liquidity.
How liquidity is handled varies depending on the trader. One of the most common approaches is to use a pivot high or pivot low. For better understanding, a pivot high or low is formed when several adjacent candlesticks have a higher low or lower high.
In the picture, we can see the pivot low. The candlestick has the lowest low compared to its three neighbours to the right and left.
4.Break of Structure (BOS)
Once you become familiar with this terminology, you'll realize that many SMC concepts are consistent with traditional trading ideas. A fundamental element of SMC market analysis is the emphasis on the "break of structure" (BOS) in the market.
5.Change of Character (ChoCH)
For instance, in a chart illustrating breaks of structure, each time the price surpasses the previous high, a break of structure occurs. Conversely, when the price drops below previously established lows, it signals a change of character (ChoCH). SMC traders leverage their understanding of these patterns to make informed decisions based on the market's behaviour.
