Trading Tips

How to trade Smart Money Concepts (SMC)

In the ever-evolving realm of finance and investing, the rise of the internet has sparked a wave of modern
trading concepts and strategies. Among these innovative approaches, Smart Money Concepts (SMC) has
emerged as a compelling force. But is this concept, born in the digital age, really worth the attention of
investors and traders?

This article navigates the intricate landscape of Smart Money Concepts and examines their origins,
principles, and potential impact on the contemporary financial world. As we delve into the intricacies of
this trading method, let's determine whether it holds the promise and potential to be a valuable addition
to your arsenal of investment knowledge and strategies.

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

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.
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.

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.

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.

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.

Very often BOS and CHoCH are used together, as shown in the picture below.

In contrast with Wyckoff’s Theory

The term Smart Money was first introduced and mentioned by Richard D. Wyckoff, a renowned stock
market authority, trader, and educator who contributed significantly to the field of technical analysis. He
is known for his work on the Wyckoff Method, which aims to reveal the intentions of "smart money" in the
market. In Wyckoff's framework, "smart money" refers to large, well-informed investors, institutions, and
professionals who have the financial capacity and knowledge to move markets strategically. Wyckoff's
analysis seeks to detect the footprints of smart money through price and volume analysis, enabling
traders to make more informed decisions based on the actions of these influential market participants. In
essence, Wyckoff's concept of smart money revolves around understanding the behaviour and motives of
key players to gain a competitive edge in trading and investing.
When we closely study Wyckoff’s price cycle, we can see that in each cycle whether it is accumulation or
distribution, some points are similar to the points laid out in the SMC.

The Wyckoff Price Cycle consists of four main phases:

Accumulation
In this phase, informed investors (smart money) are quietly accumulating positions while the general
public is still bearish or unaware of the potential upward movement. Prices may trade within a range, and
volume tends to be low. The goal is to accumulate a substantial position without causing noticeable price
increases.

Markup (Advancing or Bullish Phase)

After accumulating a significant position, smart money starts to push prices higher. This phase is
characterized by a strong uptrend, increasing volume, and positive sentiment. The public begins to notice
the price movement and may start entering the market.

Distribution
During the distribution phase, smart money players begin to sell their accumulated positions to the less-
informed public. Prices may trade within a range or show signs of weakness. Volume might start to
decline as the market loses momentum. This phase is marked by a shift from bullish sentiment to
uncertainty or bearishness.

Markdown (Declining or Bearish Phase)

In the markdown phase, prices decline, and the market enters a downtrend. Volume may increase,
reflecting increased selling pressure. The public sentiment turns increasingly bearish as losses
accumulate.

For a detailed explanation of each aspect within each cycle, please refer to the following article about The
Wyckoff theory and its application in trading.

Conclusions
In conclusion, Smart Money Concepts (SMC) provides traders with a strategic framework that focuses on
understanding the actions and motives of market makers, particularly institutions such as banks and
hedge funds. This approach involves replicating the trading behaviour of influential entities, focusing on
variables such as supply, demand dynamics, and the structural aspects of the market.

SMC introduces specific terminology, including Order Blocks, Fair Value Gaps, and Liquidity, which are key
elements in analyzing market movements. These concepts align with traditional trading ideas and
contribute to a deeper understanding of market dynamics.
The emphasis on the "break of structure" (BOS) is a fundamental aspect of SMC market analysis, where
each break signifies a change in the market's behaviour. SMC traders leverage their understanding of
these patterns to make informed decisions based on market dynamics.

Comparatively, the origins of the Smart Money Concepts can be traced back to Richard D. Wyckoff, a
renowned stock market authority. Wyckoff's work on the Wyckoff Method emphasizes understanding the
intentions of "smart money" in the market through price and volume analysis. His concept of smart money
aligns with SMC, and the Wyckoff Price Cycle illustrates similar phases of accumulation, markup,
distribution, and markdown.

Essentially, both SMC and the Wyckoff Method provide traders with valuable insights into market
dynamics, helping them make informed decisions based on the actions of well-informed investors and
institutions. Understanding these concepts and their applications can contribute to a more
comprehensive and strategic approach to trading and investing.

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