The trading world is full of strategies and approaches. There are different traders, so the trading styles will also be different. Smart money concepts strategy is one such strategy. However, not many traders know about it.
As a leading financial education provider, MarketInvestopedia finds that traders must be familiar with SMC concepts. So, in this blog, we will study the smart money concept and how it works.
Introduction to Smart Money Concepts Trading Strategy
The Forex market is the largest financial market, with many small, medium, and large participants. Each participant plays a significant role in the market and affects the activities of other participants.
The entire SMC concept is based on how the activities of banks, hedge funds, big corporations, and other market participants affect individual traders. Under this strategy, an SMC trader monitors the activities of big market players to make informed decisions accordingly.
The foreign exchange market is all about buying and selling currencies. Institutions like governments, banks, and multinational corporations engage in large-volume forex transactions to conduct their day-to-day activities.
The large volume of transactions ultimately has a significant impact on currency price and liquidity. Such entities can even manipulate market conditions. That’s why advanced traders in the market give importance to their moves.
Smart money concepts trading strategy deals with watching the activities of market markers. Based on the analysis, traders can follow these institutions’ footprints or make trading decisions based on the findings.
Key Components of Smart Money Concepts Trading
The smart money concept is quite different from any other trading strategy. The approach is rarely used in the market and is quite complex for a beginner to understand. I have broken out the strategy into key components. It will help you in understanding SMC principles and using the strategy effectively:
Technical Analysis:
The smart money concepts trading strategy is quite similar to price action trading. Many forex traders consider SMC an improved version of price action, and technical analysis plays a crucial role in the strategy. Traders can identify market makers’s activities and their impact on chart patterns. Thus, tools like support and resistance, trendlines, and indicators can help you get valuable insights.
A quick glance
SMC stands for smart money concepts in forex trading. It’s a strategy for buying or selling currencies in the forex market.
SMC trading involves monitoring the activities of prominent market players like banks, hedge funds, and big corporations to make informed retail trade decisions.
SMC is quite a complex strategy that involves in-depth knowledge of market structure, price actions,, and technical analysis. It can be suitable for beginners with a proper understanding of the market.
Price action trading involves watching chart patterns to make trade decisions based on historical price movements. Meanwhile, SMC involves watching charts to ascertain the impact of market makers’ activities and making trade decisions accordingly.
Order blocks, price breakouts, character CHOCH, mitigation blocks, liquidity Gaps, and fair value gaps are major components of implementing a smart money concepts trading strategy.
Order Block represents a scenario where large groups want to buy or sell a currency pair. When a big institution wants to make large transactions without affecting the market, it divides the order into blocks or chunks to do so.
Order Blocks:
Order Block is a scenario where large groups want to buy or sell a currency pair. It is the most essential tool for tracking a currency pair’s supply and demand dynamics. An order block provides pivot information like the possibility of price movements and can even tell the direction. When a big institution wants to make large transactions without affecting the market, it uses order blocks. Basically, they divide the order into blocks or chunks so that they can transact without significantly affecting the market.
Price Breakouts:
SMC traders should always consider the support and resistance levels. These two levels will help identify breakouts, Character CHOCH, and mitigation blocks.
Whenever market players engage in high-volume transactions, they move currency prices. In such cases, the possibility of breaking immediate support or resistance in the direction of the trend is greater. These price breaks can provide trading signals to traders with Smart money ideas and tactics.
Liquidity Gaps:
Liquidity deals with the ease of buying and selling an asset. Market liquidity is already an essential concept in forex and has become far more critical for SMC traders.
A liquidity gap occurs when there is a mismatch between the demand and supply of an asset. It indicates an imbalance between buyers and sellers. Liquidity gaps can occur due to the release of financial news, the occurrence of large trades, announcements, or any other crucial events.
Fair Value Gaps:
Fair value is another popular gap, quite similar to liquidity gaps. It highlights the supply and demand dynamics and represents the imbalance between buyers and sellers. The fair value gap occurs during a highly volatile market. SMC traders can easily identify these gaps from a three-candle pattern, where the middle candle represents a strong move while the other candles act like boundaries.
How to Use Smart Money Concepts Strategy
You may have difficulty implementing the SMC strategy in forex trading. Thus, to help you out, here is a step-by-step guide to trading currencies using smart money concepts trading strategy effectively:
Enhance your Market Knowledge:
You are trading in the forex market, so the in depth knowledge of market is essential. Start with learning the basics of forex trading, including terminologies, analysis, trading strategies, risk management, leverage, and others.
When you are using the SMC strategy, an in-depth study of the approach is a must. So, learn SMC’s key concepts, principles, and implementations. In addition, get well-versed in the forex market structure and participants, considering your currency pairs. It will help you in making trading decisions with ease. Further, learn SMC components like order blocks, liquidity gaps, fair value gaps, and price breakouts.
Master Price action Strategy:
The core concepts of smart money concepts trading strategy is watching big players and placing trade accordingly. However, the process of identifying trade opportunities is the same as price action. Thus mastering price action and technical analysis become important.
So in this step learn about technical analysis indicators, charts, candlesticks patterns and trend lines. Also learn to identify support and resistance, price high, lows, and swings.
Monitor Charts and Identify Opportunities:
Now that you have the theoretical knowledge of SMC strategy, its time to get practical understanding. Charts plays a crucial role in identifying the change that high volume trade has make to the currency price. You can use different time frame charts to identify orders blocks, liquidity gaps, fair value gaps, price breakouts, and other crucial components.
Every time a liquidity gap or breakout is expected to occur, you can see a particular pattern on charts. So, you just need to learn to identify these visual representations to spot high-volume trade activities.
Start Trading:
Once you have identified SMC components on charts, determine your trade entry and exit points based on analysis. If you are new to smart money concepts trading strategy, the best way to practice it is on demo accounts.
Demo trading allows you to practice different trading strategies without any risk of losing money. You can identify the weaknesses and strengths of your SMC strategy and customize it accordingly. Practice SMC demo trading for a significant period of time and analyze the results.
If you are satisfied with demo trading results, start implementing the strategy on real accounts. During the initial days of your SMC trading, trade with a small amount. Also, proper risk management rules and trade should be followed using stop loss or limit orders. In addition, keep an eye on your trade to make changes accordingly.
Bottom Line
Many traders consider the approach of smart money concepts as a vague strategy. That is because of limitations like complexity, so much importance to big entities, and inappropriateness for beginners. However, traders can actually make a good amount by using the strategy. Whether you are an SMC trader or not, it is important to consider what market giants are doing.
In the financial market, supply and demand dynamics play a crucial role. When it comes to the forex market, market makers’ moves can significantly swing these dynamics. So traders can take advantage of such moves and stand out from the crowd.