There are many strategies and frameworks in this world of trading that help the trader to understand what the next movement of the market is going to be and plan their decisions accordingly. A very popular concept that we call the smart money concept has come to be very popular in the last few years, which defines institutional players and how retail traders can align their trades with them.
In this blog I will tell you what smart money concepts are and their importance in modern trading and how we can make money from trading by applying them.
Understanding Smart Money:
The word smart money refers to large institutional investors, hash fund managers, and market makers and banks, etc., who have a lot of capital and use that capital to move the market. Retail traders can never move the market, but they have to align their trades with the smart money concept. Smart money manipulate the market and drive out traders who have little trading knowledge.
Key Components of Smart Money Concepts:
1. Market Structure: –
“Market structure” refers to the overall pattern of price movements, encompassing trends, reversals, and consolidation phases. By analysing market structures, traders find pin point moments that when their trend shifts or breakouts happen or momentum is about to form. Institutional players mostly buy in the demand zone where prices fall below and sell at the supply zone where the prices are very high. Recognizing these zones gives retail traders the opportunity to trade alongside “smart money”.
2. Order Blocks: –
Order blocks price ranges where institutional players have previously placed a very large buy or sell orders, these areas have referred very strong support and resistance and these areas prove to be very good reversal points or a lot of consolidation happens in these zones. When price revisits this order block, smart money now uses this opportunity to place buys and sell orders.
3. Liquidity and Stop Hunts: –
Institutions must target areas of high liquidity, which are the regions where retail traders place their stop losses. These areas are slightly above the previous high and slightly below the previous low. Whenever the price enters these areas, the institutions trigger the stop loss and provide opportunity to smart money to enter the trade. When price taps in the liquidity zones, there is an opportunity that allows smart money to manipulate and move the market.
4. Imbalance (Fair Value Gap): –
“Imbalances”, also known as “Fair Value Gaps (FVG)”, refer to zones on a price chart where a rapid price movement leaves behind unfilled orders, creating a “gap” or imbalance between buyers and sellers. The market often retraces to these gaps to fill the unfilled orders before continuing its previous direction. – Traders can identify these gaps and place trades, expecting the price to return to these areas before resuming the main trend. “Trading fair value gaps in forex” can be highly profitable when timed correctly.
5. Break of Structure (BOS) and Change of Character (CHoCH): –
A “Break of Structure (BOS)” occurs when the market breaks out of an established trend, indicating a potential reversal or continuation of a move. – “Change of Character (CHoCH)” marks the shift from a bullish market to a bearish one, or vice versa. These changes in structure provide critical insights into the intentions of institutional traders and the future direction of the market. – “BOS trading” provides an effective way to capture trend reversals and profit from the early stages of new market movements.
6. “Premium and Discount Zones”: –
“Premium and discount zones” help traders determine whether the price is in a “premium” (overvalued) or “discount” (undervalued) area relative to the overall market. Institutions usually buy in discount zones and sell in premium zones.
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How to Make Money with Smart Money Concepts
Now we will explore the foundational components of Smart Money Concepts that can help you make great money. Below are some very strong strategies to apply in forex and other financial markets.
1. Identify Key Zones: Order Blocks, Supply & Demand: –
Start by identifying “order blocks” on your chart—these are areas where institutional traders have placed large buy or sell orders, creating strong zones of demand (support) or supply (resistance). – Use higher timeframes, such as 4-hour or daily charts, to locate these zones. Once identified, wait for the price to return to these areas for potential trade entries.
2. Wait for Price Action Confirmation: –
After identifying the key zones, wait for “price action confirmation” before entering a trade. Enter trades in the direction of smart money, with proper risk management in place.
3. Use Liquidity Hunts to Your Advantage:
– Institutions often manipulate price to target “liquidity zones”—where retail traders have placed “stop-loss orders”—such as above previous highs or below previous lows. Institutions trigger these stop-losses before moving the price in the opposite direction.
– When the price moves into these “liquidity zones” and quickly reverses, it presents an opportunity for retail traders to follow the “smart money”. “How to profit using BOS and CHoCH” often involves entering trades after liquidity grabs and sharp reversals.
4. Exploit Imbalances (Fair Value Gaps):
– Look for “fair value gaps” on your price charts—areas where the market moved quickly, leaving behind unfilled orders. The market often retraces to these gaps to fill the imbalance before resuming its trend.
– When the price retraces to these gaps, it can provide an ideal entry point for trades. Set your “trade entries” in these zones, using them to your advantage as the market resumes its movement.
5. Monitor Breaks of Structure and Trend Changes:
– Pay close attention to “Breaks of Structure (BOS)” and “Changes of Character (CHoCH)”, as these are key indicators of potential market reversals. When these shifts occur, it signals that institutional traders are likely repositioning their capital.
– Align your trades with the market direction following a BOS or CHoCH, and avoid trading against the larger trend.
6. Risk Management and Position Sizing:
– Effective “risk management” is critical, even when following “smart money”. Set clear “stop-losses” below demand zones in bullish setups or above supply zones in bearish setups, and never risk more than a small percentage of your capital on any single trade.
– Consider using “trade scaling”—adding to your position as price action confirms your analysis—to maximize profit while keeping risk under control.
Practical Example: Applying SMC in Forex Trading
To better understand how SMC can be applied, let’s walk through an example in a “forex market”:
- . Identify a “key demand zone” on the daily chart, where price previously rallied after a period of consolidation. This order block is likely where smart money accumulated positions.
- Confirm the trade with a “break of structure” on a 15-minute chart, showing that the price is breaking upward from the demand zone.
- Place a “buy trade” with a stop-loss just below the demand zone to manage risk. Set your target at a level where the price previously encountered resistance (a supply zone).
As the trade progresses, trail your stop-loss to lock in profits, and consider scaling your position if price action continues to validate the upward movement.
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