Understanding Smart Money Concept in Trading
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ScribdTranslationsUnderstanding Smart Money Concept in Trading
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ScribdTranslationsSMC Trading Definition
The SMC or Smart Money Concept is a trading approach
investment whereby participants in financial markets
mainly consists of two camps:
The Smart Money
2. The Dumb Money
In simplified terms, Smart Money consists of traders and
institutional investors while Dumb Money represents
traders and individual investors also known as 'retails' in English.
That is why the movements that appear in the markets like
Forex, indices, or even commodities to name just a few.
more importantly, surprise a large majority of individuals.
To give you a simple example:
Many retail traders often complain about exiting their trades.
at a loss while the market movement is heading in the expected direction little
after a while. This is often associated with the need for compensation that
Institutional investors have a place to place their orders. This is what is called
Also the manipulation or market trap found in the Bulls
trap and Bear trap.
So is it possible to see where the institutions have intervened since your...
graphics?
Like everything else, in trading, it is not possible to win all the time, it goes
similarly to identify the price levels at which institutions have
placed their orders. Nevertheless, it is possible to find on your charts
price zones that may have been dealt with by Smart Money!
The Order Block
According to the SMC, an Order Block is an area of
price that triggered a significant amount of orders
of purchase or sale, possibly from Smart Money.
These phenomena leave readable and interpretable traces on the markets.
notably with the formation of certain troughs or peaks on your graphs
of trading.
The order block zones can thus be perceived as:
The last bearish move before the rise (last sell before the buy)
The last upward movement before the decline (last buy before the sell)
This last bearish or bullish movement can also be composed of the
last bearish or bullish candle of a set of candles.
Important element: It is possible to determine higher order blocks.
relevant to what is called an imbalance.
To find our videos on the topic of SMC Trading, specifically Order Blocks,
We invite you to discover our playlist on our YouTube channel.
The Imbalance
The imbalance or imbalance in French, also called FGV (Fair Value Gap),
Inefficiency in English is a graphical way to find areas and
relevant order blocks on your charts. These imbalances are established on 3
Japanese chandelier candles.
Here’s how!
If the wick of candle 3 does not touch the wick of candle 1 then
the imbalance is present in candle 2 (black space in the candle) between
the extreme points of candles 1 and 3.
Find an illustration of the Imbalances further in the article.
Imbalances are market imbalances and reflect a
important difference between supply and demand, a phenomenon that can be a
consequence of the Smart Money order injection. These are then areas
to align with the Order Block areas.
This disparity may arise from different factors such as the publication of
economic news, or even political events or even some
famous triggers of large order blocks in the markets.
According to the SMC approach, imbalances represent a visible trace of
potential movements initiated by institutional investors.
Now that you have a clearer idea of the behavior of the Smart
Money, let's immediately see the key concept of liquidity.
Key Concept: Liquidity
For Traders who use the concept of Smart Money, the principle of
liquidity is essential.
What does liquidity look like on your trading charts?
Liquidity can take on different forms such as:
A peak, a trough
A double top or double bottom
A downward trend line, an upward trend line
It is this liquidity that is sought by institutions in order to provide
trigger their investment and speculation orders and positions. It is
also one of the reasons why you have certain losing positions
despite the good directional bias.
The SMC Trend
To follow the intentions of Smart Money, it is important not to
limit to a unit of time in your graphical analysis. More important
again, institutional investors study and take advantage of the trends present on
large time units, it is therefore logical to follow this
process to try to trade in the same direction as them. But be careful, some
errors can always be made and a financial loss can occur
climb up.
To study the SMC trend you can use theDow Theory.
Find backthe Dow Theory in video on our YouTube channel!
This theory helps to understand the SMC trend, if it is applied to
units of higher time, in order to intervene in units of time
lower, in line with the underlying trend.
Once the trend is identified, all that remains is to understand how the
SMC traders are active in the markets!
SMC: Smart Money Concept Strategy
To give you an overview of the SMC strategy, we recall here the
5 pillars of this strategy:
The trend (with BOS)
2. The order blocks (OB)
3. The imbalance (IMB)
4. Liquidity (LQ)
5. The change of trend also called Change Of Character
(CHOCH)
Let's take the example of a bull market on the daily chart (D1),
bullish according to Dow theory.
We find the formation of peaks and troughs increasingly high with the help of
red points (peaks) and green points (troughs) which constitutes our first
point of the list (point 1).
This concept also refers to the principle of structural break called in
Break of Structure (BOS). The latter emphasizes the need to have the latest
broken peak in an upward DOW theory to potentially have
a quality order block zone.
So where is this famous area?
To properly identify the area in question, we need to find the order block.
recent. To do this, we look at the origin point of the last trough before
the formation of an imbalance (where the green arrow is located). This is the last one.
bearish candle before the rise, it is points 2 and 3 of our list!
The D1 daily order block remains visible with the gray area. We can see precisely the
price to return, test and bounce back in the area towards the end of the chart.
But what happened in the meantime?
As you can see, a lot of liquidity was taken before the arrival
in the OB zone, due to the upward trend line in red and the
formation of the double bottom. In addition, we can add the break of the bottoms
consecutive leading to the daily order block zone.
All these levels of liquidity have indeed been broken to come back better.
test the daily order block. This means that weak hands, in other words
retail traders are likely more focused on the decline of
the USDJPY while the strong hands, the Smart Money, steer their
operations towards purchases. This is called the transfer between hands
strong and weak hands. This is item number 4 on our list!
And that is why, in the D1 order block, the hourly trend
(H1) starts to turn around causing a change of character (CHOCH)
in other words, a change in trend with the break of the last peak
where you can find the note 'ENTRY' because of this change of context
perhaps an opportunity in itself to try to take advantage of the movement more
largely bullish expected on the daily chart towards the peak
previous. This is then point 5 of our list of the 5 pillars of this strategy.
Smart Money Concept.
Conclusion SMC Trading
In conclusion, the Smart Money Concept (SMC) is an approach to trading.
still unknown but distinguishes both the institutions (Smart
Money) and retail traders (Dumb Money).
This SMC approach focuses on identifying Order Blocks.
Imbalances to try to identify the place where they are positioned
institutional traders. A fundamental point: the search for liquidity.