What is SMC Trading in detail?
Smart Money Concept is a trading approach that allows you to follow the path of large traders and take trades in their buying and selling zones. In this, many trading strategies are combined to execute trades. A trader takes trades based on various factors such as order block, liquidity, break of structure, fair value gap, inducement, mitigation, supply and demand zones, and liquidity grab.
When you trade according to institutional investors and traders, your stop loss is very small, and the target is double or triple that amount. SMC is not just a trading strategy but a way to understand the market. As I mentioned earlier, “smart money” refers to banks and institutions that manipulate the market.
When you look at the Smart Money Concept, it’s simply based on supply and demand zones. However, so-called SMC traders present these same things with new terms like liquidity grab, order block, fair value gap, and mitigation blocks. But when you trade personally, you’ll realize that it’s a very simple concept.
Today, I will explain everything about SMC, including where it originated and the terms used, such as order block and fair value gap. I will also detail how you can use SMC for trading.
Who introduced Smart Money Concept (SMC) at first?
The Smart Money Concept was first presented by Inner Circle Traders (ICT) as a program for understanding the market. It was introduced by Michael J. Huddleston. In this, old simple market concepts have been presented with new terms, making them seem fresh in the market. Most traders believe it’s a new concept through which they can potentially grab more profits. But if you can make a profit using SMC, what’s the harm in that?
All New Terms of SMC and How to Trade With It?
So now, let’s understand all the key terms of SMC and how trades can be taken based on them. Here, you will learn about supply and demand zones, order block, fair value gap, market structure shift, liquidity sweep, liquidity purge, break of structure, change of character, inducement, and much more.
Supply and Demand Zones
Supply and demand zones are very simple concepts, and just from the words themselves, you can understand what they are. Supply means the area from where the price always starts to fall because traders distribute their positions. And demand means that traders buy there, and due to high demand, the price starts to go up. Simply put, supply is resistance and demand is support.
Order Block (OB)
Order blocks refer to those supply and demand zones where institutional traders have placed their orders. In this, when large traders place their orders, the market reacts quickly, moving up or down. However, not all of their orders get filled in this initial movement. To fill the remaining orders, the market returns to the same zone, fills the rest of the orders, and then moves toward the target to achieve it.
How to Trade with Order Block (OB)
To trade in an order block, identify a sudden movement near the supply and demand zones, and as soon as you spot it, mark the last negative candlestick from that order block. And when the price returns again, you will get an entry at the high/low of the last negative candle, and the stop loss will be just halfway above or below it, depending on whether you’re buying or selling. Check out this image; it’ll help you understand better.
Fair Value Gap (FVG)
Now you’re going to understand what Fair Value Gap is. When institutional traders buy or sell, sudden movements occur in the market, which creates an imbalance. This imbalance is what is called a Fair Value Gap. In a perfect Fair Value Gap, there are three candlesticks, and all three should have the same color. If it’s bearish, all three will be red, and if it’s bullish, all three will be green. The imbalance occurs in the second or middle candle. Start counting the candles from the bottom for bullish or from the top for bearish, as the first, second, and third. The middle candlestick will be the imbalance candlestick.
How to Trade with Fair Value Gap (FVG)
To trade in a fair value gap, you need to wait for a retracement. This is very similar to trading with an order block. You should enter the trade when the price is in the imbalance section, meaning during the second candlestick. The target will be set at the next resistance or support, depending on your choice. The stop loss should be placed at the high or low of the first candlestick, depending on whether you’re selling or buying. Look at the image to understand better.
Market Shift Structure (MSS)
MSS helps you recognize the ongoing trend in the market and identify new trends. When new highs (HH) and higher lows (HL) are being formed in the market, MSS lets you know that an uptrend is in progress. And when new lows (LL) and lower highs (LH) are being formed, MSS indicates that a downtrend is happening.
How to Trade with Market Shift Structure (MSS)
You can trade in this way: When a new high (HH) is formed in the market, a higher low (HL) will follow, taking support from the previous high’s resistance, and then the market will aim to form a new high (HH). You can enter the trade at this point. Take a look at the image to understand clearly.
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Break of Structure (BOS)
It means that when a higher high (HH) or higher low (HL) is formed in the market, and as soon as it breaks the high or low, it is called a BOS (Break of Structure). You can understand the market trend by this, just like with MSS.
How to Trade with Break of Structure (BOS)
You can trade with this just like you did with MSS, but mainly traders do not suggest early entry in this. They prefer to add up more things like FVG and many more to confirm the trade.
Change of Character (ChoCh)
CHOCH happens when the price continues to make higher highs (HH) and higher lows (HL), but then it breaks its higher low (HL) and is unable to form a new higher high (HH). At that point, you can call it CHOCH (Change of Character). Since all of this is related to market structure shifts (MSS), that’s why I first explained MSS.
How to Trade with Change of Character (ChoCh)
You can catch a trend reversal trade using a “choch” (Change of Character). What happens here is that if the market makes a higher high (HH) and then comes down to form a higher low (HL), and if it breaks the higher low, the chances of a trend reversal increase. However, you should not enter the trade yet. When the price forms a new lower low (LL), the “choch” will be confirmed, and that’s when you can enter a reversal trade.
Liquidity Sweep (LS)
A liquidity sweep happens when large investors and traders deliberately push the market beyond an important level, like support or resistance, causing retail traders’ stop-losses to be hit. This forces many traders out of their positions, and then the market reverses from that point. This is what is called a liquidity sweep. When the same thing happens with a lot of speed, it’s called a liquidity purge.
How to Trade with Liquidity Sweep (LS)
Trading during a liquidity sweep is a bit difficult because it’s hard to determine the right entry point. However, one approach you can take is to reduce your trade size and extend your stop-loss further to give the market more room to move. Additionally, you can average your position to stay in the trade longer and manage risk more effectively.
Inducement
Inducement occurs when the market is deliberately pushed to make traders take some action. For example, if there’s a support level at 100, and most traders think it’s a good price to buy the stock, the price might push through 100 and drop to 90. Those who missed the initial move see the price drop even further and feel compelled to make a decision. If someone bought at 100, their stop-loss might get triggered, leading to a liquidity sweep.
On the other hand, those who see the price drop might think they’re getting a bargain and enter the market. They believe they’re making their own decision to enter, but this is actually part of a strategy by large investors and traders. It’s a form of liquidity sweep that creates more temptation for traders to enter the market.
Breaker
When the price creates a swing high and swing low, hunts stop-losses through inducement and liquidity sweep, and then breaks the lower low (LL) while creating a Fair Value Gap (FVG), it forms a perfect breaker.
How to Trade with Breaker
As you know that trading without any confirmation is not good for anyone. So when a breaker happer it creates a FVG, if the price returns to the FVG then you can enter in a trade and exactly like FVG as I already mentioned it here. In SMC there is no single signal to take trade there are multiple confirmations needed to take a single trade.
Conclusion on Smart Money Concept (SMC)
So, it was about SMC (Smart Money Concepts) and its key terms, and how you can trade using them. Trading in all these concepts is easy, but you need practice and time to understand these things. When you trade using traditional methods, you will start to understand all these concepts more easily.
All these terms sounds fancy and new generation attracts toward it. How ever if you can become a profitable trade by this why not using all these things.
So, that’s all for today. If you have any suggestions for improving this article, please contact us through the contact form provided below. We would be very happy to hear your suggestions.
Happy Trading to all Traders.
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