5 Smart Money Concepts (SMC) Terms You

Must Know

JinDao Tai - 戴金道

The simplest way to describe Smart Money Concepts (SMC) trading is to say that it
is price action by a different name. SMC involves using classic Forex concepts like supply
and demand, price patterns, and support and resistance to trade, but the concepts have
been renamed and described in a different way.

SMC is not just a Forex trading strategy, but an entire philosophy about how the
markets work. Basically, SMC states that market makers (i.e., banks, hedge funds, etc.)
are manipulative entities that conduct trading activity at specific levels.

According to SMC, as a retail trader, you should base your strategy on what is
happening with the "smart money".

SMC traders refer to ideas like "liquidity grabs" and "mitigation blocks." While their
terminology may sound foreign, when you examine SMC, you will realize it is a more
traditional trading approach than it appears at a glance.

The most common terms used in smart money concepts are;

 Break of Structure (BOS)

 Change in Character (CHOCH)
 Shift of Market Structure (SMS)
 Order Blocks
 Fair Value Gap (FVG)

1) Break of Structure (BOS)

This denotes that the market is giving its first indication that the price is about to turn
against you. For example, when the price makes a new lower low and lower high, the
market structure is broken, which is your first indication that the market is ready to
reverse lower.

Every trader should normally trade in the direction of the Higher Time Frame BOS when
this occurs when the price closes above/below a swing high/low.

BOS (Break of structure)

When price breaks a low or high then it is called BOS or break of structure.
dBOS (Double break of structure)
When price breaks two lows or highs respectively then it is called dBOS or double break
of structure.
mBOS (Minor break of structure)
When price breaks lows or highs in the lower timeframes then it is called mBOS or minor
break of structure

2) Change in Character (CHOCH)

A CHOCH is an initial shift that can sometimes signal a short- or even long-term price
reversal. Hours are generally considered a reversal pattern that SMC traders use on the
higher time frames for market direction and on the lower time frames to start looking
for trades on the 1-minute chart.
Most SMC traders like to use ChoChs on all of the timeframes to get a sense of market
direction and to start looking for intraday reversals or reactions to 15m POls (points of
interest).

To use a ChoCh, you simply just need to look for a shift in order flow (the last level of
demand or supply failing) on the timeframes that you trade.

It should be noted that ChoChs should only be used as a confluence and not something
you rely on solely for getting market direction or looking for confirmations on the lower
time frames.

3) Shift of Market Structure (SMS)

SMS is a structural market change that is broadly defined as a shift or change in the way
in which a market or economy functions or operates.

Commonly, when you see a strong parabolic move higher, you would be thinking if the
trend is about to reverse.

As we look for a shift of market structure, you are looking for a lower high and a lower
low. When the price breaks below the area of support, you have a lower low which is
likely to tell you that this trend could be weakening.

4) ORDER BLOCKS
Order blocks are collections of orders from major banks and institutions that trade
foreign exchange on the financial market. To increase the likelihood of profit, the big
banks split a single order into a number of blocks rather than just opening a buy/sell
order. In trading, these order groups are known as “order blocks.”

Order blocks work by creating a supply and demand imbalance in the market. When a
large number of buy or sell orders are placed at a specific price level, it creates a
significant level of support or resistance. This means that if the market reaches that price
level again, it is likely to bounce off it and move in the opposite direction.

Identifying order blocks can be challenging, but it’s a crucial skill for traders. There are
several ways to identify order blocks, such as:
1. Looking for clusters of candlesticks – Order blocks usually appear as clusters of
candlesticks on the price chart. These clusters can be either bullish or bearish,
depending on the concentration of buy or sell orders.

2. Identifying significant price levels – Order blocks are often found at significant price
levels, such as previous highs or lows, Fibonacci retracements, or round numbers.

3. Observing market reactions – Traders can observe market reactions at specific price
levels to identify order blocks. For example, if the market bounces off a particular price
level multiple times, it’s likely that there is a cluster of orders at that level.

OB (Order block)

OB or order block is the last opposing one or multiple close candles before a strong
directional move. The last sell Candle before the bullish impulse move is called bullish
order block and the last buy candle before the bearish impulse move is called bearish
order block.

5) FAIR VALUE GAP (FVG) or IMB (Imbalance) or

Inefficiency
Fair Value Gaps are most commonly used amongst price action traders and are defined
as instances in which there are inefficiencies, or imbalances, in the market. These
“imbalances” simply suggest that buying and selling are not equal. Fair value gaps are a
very useful concept in price action trading, as they provide a trader with information
about where a lot of orders were injected, creating this inefficiency in the market.

This inefficiency can become a magnet for price in the future to resolve it, as there are
many resting orders. A trader can use this information to target a fair value gap or to
look for a potential entry for a long or short, making it a good POI.

IMB (Imbalance)

Imbalance is an area of unequal market moves where there are only buyers or only
sellers exist in the market. It is inefficient or unhealthy price action. It shows
disequilibrium between Buyers/Sellers. So an imbalance means unfair price action where
the market will almost always come back to fill. Here, the wicks do not fill each other (If
they do then it is healthy price action and not an imbalance). It is not mitigation. So, the
price doesn’t have to reverse from that point).

INF (Inefficiency)

It indicates the lack of buyers or sellers in price action, leaving disequilibrium that
eventually needs to be filled. If there’s a gap with a large candle that’s the inefficiency of
price

EQ (Equilibrium)
It means fair market value or 50%.

AOI (Area of interest)

These are the areas where we expect the price will react and has the possibility to
reverse direction.

POI (Point of interest)

It is also called DP or decision point

LQ (Liquidity)

Liquidity simply means money or huge opposite orders to be filled to fuel the
movement of the market institutions.

IPA (Inefficient price action)

Inefficient price action or imbalance(Lack of Buyers/Sellers in price action, leaving

disequilibrium that eventually needs to be filled)
EQL (Equal lows)

It simply means the liquidity below the double bottom (DB).

EQH (Equal highs)

It means the liquidity above the double top (DT).

IT (Institutional Trading)

There are several ways to identify institutional trading. These are:

 SHC (Stop Hunt Candle)
 Fake-out
 OB (Order Block)
 Large Volume Range
 Imbalances (Lack of Buyers/Sellers in price action, leaving disequilibrium that
eventually needs to be filled)

WKF (Wyckoff)

WAS – Wyckoff Accumulation UT – Upthrust

Schematic
WDS – Wyckoff Distribution UTAD – Upthrust After Distribution
Schematic
SC – Selling Climax
ST – Secondary Test
BC – Buying Climax
SOS – Sign of Strength
AR – Automatic Rally Reaction)
SOW – Sign of Weakness
TR – Trading Range
LPS – Last Point of Support
PS – Preliminary Support
LPSY – Last Point of Supply
PSY – Preliminary Supply MOM – Momentum

Other Abbreviations HTF – Higher Time Frame

BFI – Banks & Financial Institutions LTF – Lower Time Frame

PA – Price action R = Reward/percentage

HH – Higher High RSP – Real Structure Point

HL – Higher Low PRZ – Price Reversal Zone

LH – Lower High CPB – Complex Pullback

LL – Lower Low M – Momentum

Fib – Fibonacci RR – Risk: Reward

TF – TF TGT – Target

LTF – Lower time frames SL – Stop Loss

HTF – Higher time frames BE – Breakeven

MN – Monthly BSL – Buy-side liquidity

W – Weekly SSL – Sell-side liquidity

D – Daily SC – Sponsored candle

H4 – 4 hours IFC – Institutionally funded candle

H1 – 1 hour EOF – Expectational order flow

M15 – 15 minutes Liq – Liquidity

M1 – 1 minute SMC – Smart Money Concepts

MS – Market Structure SB – Sub break of structure

DD – Drawdown

Be – Bearish OBIM – Order Block with Imbalance

Bu – Bullish OBOB – Lower timeframe Order

Block within a higher timeframe
HNS – Head and Shoulders Order Block

IT – Institutional Traders TR – Trading Range

CO – Composite Operators IT – Institutional Traders

WHB – Weak Handed Buyers CO – Composite Operators

WHS – Weak Handed Sellers LP – Liquidity Providers

SHC – Stop Hunt Candle