Trading Strategy: Smart Money Concept

Greetings, dear traders! In this article, we will analyze one of the most effective trading strategies – Smart Money Concept. This is a detailed manual – will help you understand the Smart Money concept. Thanks to this strategy, you will be able to better understand the market and start making stable money on trading.

Introducing the Smart Money concept

Smart Money is a large capital in the market, which has large volumes of assets and cash at its disposal. As a rule, they are the central banks of countries and large banks, financial funds, hedge funds, institutional investors, and other large institutions. Among them, such organizations as Bank of America, Goldman Sachs Bank, Barclays stand out.

Difference between Tech Analysis and Smart Money

Let me make a small remark – Smart Money is technical analysis, because the concept of smart money is based on Price Action tools – that is, candlestick analysis. So on the chart, using candlesticks, we can see traces of a large player, where he gained a position and carried out various price manipulations in order to knock out the crowd’s stop losses.

Therefore, by the word technical analysis, I will mean classic technical analysis, which uses various graphic figures, waves, oscillators, moving averages, indicators and much more, in a word, an attempt to guess where the price will go and that’s it.

Classic technical analysis is just invented for retail traders.

Technical analysis is bait for large players. Since they have large capital and can manipulate the price in the direction they need, using retail traders’ tools, i.e. technical analysis tools. This is the whole difference between the two trading styles.

Trading according to the Smart Money concept is more profitable than using other trading strategies. Since most speculators use technical analysis, and it does not understand liquidity. In other words, there are no zones where most players have stops. Because of this, ordinary speculators often lose money.

Such players, having almost unlimited capital, can globally influence the financial market, using special algorithms to literally manage the price of an asset – achieving their goals and objectives.

And in order to be able to see the behavior of such large players in the market, the Smart Money concept was developed, which is a set of tools.

Smart Money Concept (Smart Money Concept) is a set of trading tools that allow you to see various actions and manipulations with the price on the market – large capital.

Also, we have large players on the market, the so-called market makers, they act as a liquidity provider in the market.

Let us add that the founder of the Smart Money strategy is American trader Michael Huddleston, better known as Inner Circle Trader (ICT for short). Michael discovered that a major player begins his actions at the moment when hamsters, i.e. inexperienced traders who trade without a strategy or have no experience and suffer losses, begin to enter into transactions en masse. Such price manipulations are visible on Forex, the stock market and the cryptocurrency market.

Smart Money is completely different from technical analysis, where retail traders try to follow trends. You’ve probably heard that 95% of traders drain their deposits on the market and this is true, but I think the figure is understated)) Even Smart Money traders cannot all earn stably due to the lack of a deep understanding of all the tools, problems with emotions and psychology, lack of experience and simply do not know how to manage their time (time management) and risks (risk management).

That’s why we, the SM Trader team, strive to improve your understanding and trading on the market so that you yourself do not end up in the “hands” of large capital, so we provide all the training material!

To better understand how trading and the market as a whole work, it is important to understand the basics of trading and the nuances of the market, follow the information and practice a lot.

What is the goal of Smart Money Trader?

Our task is to track and repeat the actions of the big guys, which are visible on the chart, using the tools of the concept. We will analyze them in more detail below.

Market cycle and trends, market phases

The market is always in motion, either in a trend direction: up or down, or is in a sideways movement (accumulation – purchases and distribution – sales).

Before an upward trend movement occurs, a major player needs to accumulate a position, that is, hold the price in a narrow range – the accumulation phase, as soon as the position is accumulated, then an upward trend occurs, in order to sell the previously accumulated position, the price must again be held in a sideways movement – the distribution phase.

So on our chart it is regularly repeated in the form of market cycles.

We distinguish 2 types of trends in the market:

Global trend, otherwise known as Macrostructure or Primary structure – is determined on higher timeframes: week (W1), daily (D1), less often month (M) is used, as this is a fairly long period of time;
Local trend, otherwise known as Microstructure or Secondary structure – is determined on lower timeframes: 4 hours (H4), hourly (H1).
To determine the trend, we use the market structure.

We always give priority to the higher timeframe.

So, to summarize, we open trades strictly in the direction of the trend, trades against the trend are considered quite risky.
Market Structure – a tool for determining in which direction the asset price is moving, that is, the trend, and also with the help of the market structure we make decisions on the market.

The structure is determined using the structural points Swing High (Maximums) and Swing Low (Minimums). The structure consists of 3 market phases:

Ascending structure – price movement in which significant highs (HH) are updated, without updating significant lows (HL).
Descending structure – price movement in which significant lows (LL) are updated, without updating significant highs (LH).

Sideways movement (Accumulation or distribution) – price movement in which there is no update of significant highs and lows.

First, let’s get acquainted with what significant lows and highs of the price are

Structural points of Swing
Swing is a structural point in which the price reverses.

Swing High – the highest structural point, consists of 3 consecutive candles, where the central candle has a higher high, and the two outer candles have lower highs relative to the central one.

Swing Low – the lowest structural point, consists of 3 consecutive candles, where the central candle has a lower low, and the two outer candles have higher lows relative to the central one.

So, our market moves in 3 directions: ascending structure, descending structure, consolidation (sideways, range).

Upward Structure

A series of higher highs (HH) and higher lows (HL).

Downward Market Structure
A series of lower highs (LH) and lower lows (LL).

Price consolidation – in the Smart Money concept, the term Range (Flat, sideways, sideways movement, trading) is used for designation. This is a market movement without a clear trend, as a rule, the price is squeezed into a trading range between significant highs and lows, roughly speaking, as if it is standing still, or rather moving to the right:)

In this range, it maintains a balance between buyers’ demand and sellers’ supply.

The reason for the sideways (Flat) is usually that a large one has deliberately squeezed the price in a narrow range in order to gain or lose a position, or simply a lack of interest in the asset on the part of market participants.

To designate the Range on the chart, a Fibonacci correction grid is used with values 0; 0.5; 1

Where the values 0 and 1 are the boundaries of the sideways movement, and 0.5 is the middle of the sideways movement, which is a fair price (Equilibrium), a price reaction can also be expected from this level.

Exiting the upper and lower boundaries of the Range is called Deviation. The price exit is usually accompanied by large capital in order to manipulate the price – seize liquidity to gain a position. In the case of the price returning back to the Range, you should expect the price to move to the opposite boundary, thus the price moves up and down for liquidity like a game of snake))

Deviation is sometimes used to find entry points, there are 2 ways to enter a deal:

Aggressively – when the price goes beyond the Range – a very risky way, there is a high probability that the price will roll back into the range.
Conservatively – after the price goes beyond the Range and is fixed above the range.

Break of structure

Let’s repeat a little, so we have an upward trend (Updating maximums without updating minimums) and a downward trend (Updating minimums without updating maximums).

Break of structure can be called differently in different sources BOS (Break of Structure), BMS (break market structure), CHoCH (Change of character) – I will say only one thing, it is all the same. 

In order not to get confused in the construction of the structure, a change in the direction of the structure is designated as CHoCH, and a renewal of the structure in the same direction or confirmation of a change in the structure is designated as BoS.

BoS – a breakdown of the structure, renewal of structural minimums and maximums in the direction of the trend, ascending – renewal of maximums, descending – renewal of minimums
CHoCH – a change in the character (mood) on the market, a change in the direction of the trend
Sometimes the first BoS after CHoCH is called Confirm – which is a confirmation that CHoCH has actually occurred, that is, a change in the trend.

Examples of what we consider CHoCH and what is just a complex correction:

The point is that if we have not updated the minimum for an ascending structure or have not updated the maximum for an ascending structure, we do not consider it as CHoCH (change in the nature of the market) – this is just a complex correction:

We enter into trades in the direction of the trend, in order to enter into a trade correctly, we must necessarily get sufficient price correction, for this we also use the Fibonacci grid with levels 0; 0.5; 1 (which I described earlier for Range), and also apply OEP zones (optimal entry point).

How to trade:

We build a Fibonacci grid on significant highs and lows, according to the market structure and wait for the price to roll back to the OEP zone;
In the OEP zone, we determine our liquidity blocks (imbalance, order block, breaker, etc.) from which we can open trades. From these trading instruments at levels 0.5-0.79, you can open trades, very trades are taken from the level of 0.705

Liquidity in the market. The basis of price movement

Liquidity is perhaps the most important aspect of the entire concept. Roughly speaking, liquidity is the largest accumulation of money in the form of pending orders and stop orders of the majority of market players. Liquidity accumulation is located in certain price zones.

Why is liquidity so important? Because it is, roughly speaking, a price magnet for large capital, with the purpose of gaining or losing positions.

Types of liquidity:

Equal highs EQH and lows EQL
Structural points Swing – significant High or Low
Boundaries in lateral price movement (Range, flat, sideways)
Trend movement – ​​liquidity behind the trend line

Imbalance

Imbalance (IMB) – price imbalance between demand (purchases) and supply (sales).

On the chart – this is a strong impulse price movement that occurs after a major player has poured a large amount of capital into the market.

Under normal market conditions, price movement does not create gaps between the shadows of candles – this is defined as the effective price of the asset:

When an inefficient price change or price imbalance occurs, it is due to a lack of liquidity in the market, on the chart it looks like a strong impulse candle within which a significant volume of the asset was traded:

In this price range, there is an imbalance between supply and demand due to price inefficiency, the reason is precisely the lack of liquidity, that is, counter orders.

This price imbalance is a magnet for the price and large capital will try to cover the imbalance entirely (Full Fill). Sometimes it is enough to cover the imbalance by 50%.

Order Flow

Order Flow is the data on the number and volume of buy and sell orders that enter the market. Market makers use these orders to identify areas that may be of most interest to them. This allows traders to find opportunities to enter the market during a trend change. Bearish Order Flow after trend change:

Order Flow analysis helps traders understand what positions large market participants, such as institutional investors and banks, are taking and what decisions they may be making. For example, if a large player starts buying up a large amount of shares, this may be a signal for a trader to enter a position, as the stock price is expected to rise.

Order Blocks

Order Block (OB) – a place where large capital has gained its position. On the chart, this is a candle in which a huge volume of an asset was traded – by large capital, before that, liquidity was manipulated.

There are 2 types of order blocks:

Bullish OB (Block of orders for purchases) – the lowest pullback candle that removes the lower liquidity (stop losses in long), then the price moves in an upward impulse direction;
Bearish OB (Block of orders for sales) – the highest pullback candle that removes the upper liquidity (stop losses in short), then the price moves in a downward impulse direction. Bullish and Bearish Order Block’s:

When defining an order block, the color of the rollback candle is not important
A valid order block is an order block that complies with:

1. Trend. It is recommended to trade order blocks in the direction of the trend;
2. Liquidity withdrawal. An order block is formed strictly after liquidity withdrawal, otherwise what kind of order block is it in which liquidity is not collected, that is, the big guy did not actually enter the position and this is a false order block;
3. There is liquidity before the order block. Liquidity – before the order block increases the likelihood that the price will return, take liquidity and give us an entry point;
4. The order itself is not liquidity. After the order block, there should be no accumulation of liquidity, imbalance, other order blocks – otherwise our order block itself will be profit for a big player;
5. Our order block is relevant. After the order block, there should be no other order blocks without retests, if they have already worked – then;
6. Structural OB is allowed. The order block should have been in the structure where either a structure update (BOS) or a structure change (СHoCH) occurs next
7. Imbalance. A valid order block is the one that was immediately absorbed by impulse with the formation of an imbalance and then a structure update, the big guys gained their position and immediately got into their slippers, why should they hesitate?

How to use order blocks?
The order block acts as an important tool for opening positions.

Transactions are entered in 2 ways:

1) From the beginning of the order block extremum (wick or body);

2) With confirmation of the reaction from the order block on a lower timeframe.

Each order block can be tested only once, repeated attempts are not recommended, there is a high probability of getting a stop loss.

The most conservative way to enter a trade is to get confirmation of the reaction on a lower timeframe:

For order blocks on lower timeframes:

For OB m15, we get confirmation by the m1 structure;
For OB H1, we get confirmation by the m5 structure;
For OB H4, confirmation on m15.

On higher order blocks:

For daily OB D1, we get confirmation by the H1 structure;
For weekly OB W1, confirmation on H4.
Ob of the month is very rarely traded, confirmation on D1

If you trade medium-term, then choose the optimal order blocks H1 and H4, if you trade intraday, then your timeframes for searching for order blocks on LTF: m1 – HTF: m15 and LTF: m5 – HTF: H1.

Breaker Block

Breaker Block (BB) is a place on the chart where the structure is broken, it means that the market, growing upwards, turns down or vice versa, the price, moving downwards, goes into an upward trend. In other words, it is a reversal tool that should knock out the maximum/minimum and then break through.

It is worth noting that the breaker block does not always indicate a market reversal, it can also signal the continuation of the trend. To determine the trend for an ascending structure, it is necessary to determine significant maximums HH (Higher High – a higher maximum) and minimums HL (Higher Low – a higher minimum), and for a descending structure, determine significant minimums LL (Lower Low – a lower minimum) and maximums LH (Lower High – a lower maximum).

Breaker block is determined by the following criteria:

• removal of liquidity from a significant maximum or minimum
• impulse breakout block order
• return of the price and retest of the breaker zone

Mitigation block

Mitigation block (MB) is essentially the same as a breaker block, but the only difference is that it does not update minimums/maximums and thus does not remove liquidity before an impulse breakout. This tool is used much less often in trading. Personally, I do not use Mitigation block in my trading, VERY weak performance. Example no Minimum and or no Maximim updated (white lines):

Difference between Mitigation Block (MB) and Breaker Block (BB):