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What is SMC (Smart Money Concepts) Forex Strategy? 

SMC Smart Money Concepts

Highlights:

  • Smart Money Concepts (SMC) replace old terms like supply and demand, support and resistance, and price patterns.
  • SMC traders follow smart money investments, analyzing market sentiment and future currency contracts.

In forex trading, it is necessary to understand what big players like banks and hedge funds are doing. These major players are very important to follow. Knowing their strategies can give small retail traders a big advantage. Herein comes the significance of SMC. The latest approach to price action strategy is called smart money concepts trading. It replaces old terms like supply and demand, support and resistance, and price patterns.

This concept believes that big players like institutional investors, central banks, hedge funds, and market makers control the market. They often do this to the disadvantage of small retail traders. The idea is that retail traders should follow the trades of these big players instead of trying to trade against them.

What is SMC Trading

SMC Trading, or Smart Money Concepts, is a trading strategy. It focuses on understanding and following big market players. These players include institutional investors, central banks, hedge funds, and market makers. SMC looks at price movements and patterns to predict future prices. It believes that large institutions manipulate market prices. This manipulation often hurts small retail traders.

SMC suggests that retail traders should follow the trades of these big players. It uses terms different from traditional trading strategies. SMC replaces ideas like supply and demand, support and resistance, and price patterns. By following smart money, retail traders can improve their chances of success.

Foundational Ideas In SMC

The Smart Money Concept introduces key ideas for traders. These ideas help traders understand market movements through the actions of big institutions.

Order Blocks:

Order blocks are areas where big investors place large orders. These orders usually form a range. Order blocks often come before a strong market moves in the block’s direction. They show areas of interest in “smart money.” When the price returns to this zone, it often reverses. This is similar to an area of support or resistance.

Breaker Blocks:

Breaker blocks are failed order blocks. When an order block does not hold the price, it breaks through. This may show that the “smart money” direction has changed. When the price breaks above or below the order block, it can act as a barrier to future prices. This is similar to how an area of support can become resistant and vice versa.

Breaks of Structure (BOS):

A BOS happens when the price goes above a key high or below a key low. This shows a possible change in market trends. It marks the end of one market phase and the start of another. BOS offers clues about the influence of “smart money” on market direction. Recognizing BOS is important for knowing trend direction.

Change of Character (ChoCH):

ChoCH refers to a noticeable change in how the market behaves. This can be seen through sudden increases in volatility or shifts in price direction. A ChoCH often comes after a BOS, confirming a potential trend reversal. It suggests a new phase of market sentiment influenced by institutional activities.

Fair Value Gaps:

These gaps on a chart show where prices move quickly, leaving gaps that indicate an imbalance between supply and demand. Institutional traders often target these gaps for potential profits, causing prices to return and fill them over time.

Liquidity:

In SMC, liquidity refers to areas where “smart money” is likely to place large orders. This is because there are many opposing orders available in the market. These areas often have stop losses and stop orders and are found around key highs or lows, trendlines, and equal highs/lows. The concept suggests that “smart money” pushes prices into these areas to execute large orders before the true market direction becomes clear, like in a bull or bear trap.

Accumulations/Distributions:

These phases indicate times when “smart money” is either accumulating (buying) or distributing (selling) their positions. Based on Wyckoff’s theory, accumulation happens at lower price levels before a significant uptrend, while distribution occurs at higher price levels before a downtrend. Identifying these phases can give insights into the future market direction favored by institutional investors.

How does SMC work?

SMC focuses on banks and the structures set up for success in the markets. These large players place significant orders that may not directly affect liquidity but influence subsequent market sentiment. Fair value gaps are key areas for smart money trading. If assets trade above or below their fair market value, this suggests financial market manipulation.

SMC traders, including retail traders, follow smart money investments by researching market sentiment and future currency contracts. This positioning helps retail traders optimize profit-taking. SMC traders use charts illustrating breaks, order blocks, and liquidity to confirm movements when engaging in SMC trading.

They also usually wait for a break of structure or a change of character pattern to act on price movements. A break of structure occurs when the price breaks above a previous high, while a change of character happens when the price breaks below a previous low and establishes a new low.

How to use SMC Trading?

There are several steps in SMC trading. Utilize free resources to apply this strategy. Thorough research is essential, regardless of your strategy.

Analysis:

  • Identify the current order blocks.
  • Assess trading liquidity (volume).
  • Monitor price charts for BOS or ChoCh patterns.

Setting Up Trading Charts:

  • Setting up charts manually can be complex.
  • Use ready-made solutions to plot critical levels and identify trends and patterns.

Choosing a Forex Broker:

  • Select a Forex broker with favourable conditions.
  • Low fees increase profit.
  • Fast execution ensures you are not blocked out during active market periods.

Executing Trades:

  • Targets in SMC trading include breakouts, reversals, and continuation patterns.
  • Open positions with appropriate risk measures.

Pros and Cons

ProsCons
Provides a solid foundation based on proven price action strategies used across various assets.Some SMC ideas don’t make sense given the irrelevance of retail traders to big players, potentially leading to misunderstandings.
Offers a clearer presentation as users find price action easier to understand as SMC.SMC theories are unprovable and based on beliefs about institutional actions.
While targeting retail traders is doubtful, larger institutions might target smaller ones, leading to observable liquidity grabs.New terms make learning complex and hinder communication with traditional price action users.
SMC’s marketing of old concepts as new and the prevalence of paywalls can be off-putting.

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