Every few years, a new strategy or concept shakes the retail trading world. Today, we are going to discuss the latest: Smart Money Concepts. While ironic, many retail forex and crypto traders claim to be Smart Money traders (or SMC traders). The name itself has raised many debates about whether it is a valid trading strategy. Yet, several success stories suggest that SMC trading is the new big deal. This has left many retail traders asking what is Smart Money Concepts.
In this CrypOption article, we introduce the basics of Smart Money Concepts. We aim to familiarize the reader with what Smart Money trading is. We also analyze whether the SMC trading strategy works. So, please stick with us to the end of this article. You will read everything from the perspective of someone who has been an SMC trader for years.
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What Are Smart Money Concepts?
Smart Money Concepts is a new trading style that has gained massive popularity. It has become a common strategy among crypto and forex traders over the last few years. Nearly every trading guru and YouTuber has talked about SMC trading concepts. Some claim to trade the strategy themselves. In contrast, others claim it to be completely useless.
Those who use Smart Money trading believe they are anticipating financial institutions’ moves. These institutions include banks and hedge funds. So, when SMC trading, you should think the opposite of how retail traders do. In fact, SMC traders mostly assume retail trading concepts to be completely false. So, the things you are about to read in this article might seem very controversial.
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Who Invented Smart Money Concepts?
You might be wondering who created Smart Money Concepts. Many traders claim they have invented Smart Money trading. Interestingly, they all have their own arguments to back it up. Yet, the most common answer to this question seems to be the Inner Circle Trader or ICT. He has seemingly been teaching Smart Money Concepts before anyone else. He also names this trading style ICT concepts. Yet, for the article’s sake, we will continue calling it SMC.
Meanwhile, some traders claim that Smart Money Concepts are the same as supply and demand. In fact, they believe SMC is only repackaged as a shiny new strategy for novice traders. Once again, you can believe anyone about the origins of these concepts. You can also believe no one. The only thing that should be important to you is whether SMC works, and that is what exactly we will discuss.
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What Are the Key Components of Smart Money Trading?
If I could summarize Smart Money Concepts in one sentence, it would be, “Do what retail traders don’t, and vice versa.” You might say I am also a retail trader, and you are 100% right. Yet, you should look at the market from a view opposite to that of more common trading styles. These include price action, indicators, Fibonacci, and all other traditional trading concepts.
When trading SMC concepts, there are two key roles: the market maker and the retail traders. To use SMC trading, you should think like a market maker. Note that in SMC concepts, the market makers are manipulators. They seek to use the liquidity offered by the masses to execute their large orders. We call the masses “retail traders.” In essence, they are looking to hunt retail traders’ stop losses. So, to trade SMC, you should try to read the minds of market makers. Aim to predict how the price might move to hunt retail traders’ stops.
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SMC Trading Strategy Basics
There is some SMC terminology that you should know when trying to design a Smart Money strategy. Here are the primary pillars of Smart Money Concepts:
Liquidity
Liquidity is the most crucial concept in Smart Money trading. It is what the price moves toward. Understanding where significant liquidity rests will give you the market’s potential direction. Yet, it is easier said than done.
In SMC trading, liquidity includes stop-market orders triggered when the price reaches them. These are typically stop-losses set by traders. Or, they are orders to capitalize on a breakout. Thus, this type of liquidity resides above or below price highs and lows. That is because the masses learn to do so.
Stop orders above price highs are buy-side liquidity. Stop orders below lows are known as sell-side liquidity. We also refer to where you suspect liquidity resides as a liquidity pool. It does not matter if it is on the buy-side or sell-side.
For instance, look at the TradingView chart below for liquidity pool examples:
Imbalance
Imbalances are price ranges that the market left too quickly. We have all seen large candles that pierce through several price points in minutes. These candles cause imbalances. Imbalances are also called Fair Value Gaps (FVG) by ICT traders.
Yet, in Smart Money Concepts, imbalances are three-candle patterns. An imbalance is the area of a candle’s body that is not covered by the previous and next candles.
We have two types of imbalances.
- A bullish imbalance is where the middle candle is bullish.
- A bearish imbalance is for a bearish middle candle.
Take a look at the TradingView chart below for some imbalance examples:
Order Block
Another key concept in the SMC trading space you might have heard about is the order block (OB). An order block (OB) is the last bearish (bullish) candle before a bullish (bearish) move. The direction of the move determines whether we have a bullish or bearish OB.
SMC traders assume the price will likely return to the OB before continuing its initial move. Smart Money traders believe institutions would like to enter around these prices again.
They also believe some of these market makers already entered around the orderblock. So, they will defend their positions if the price returns to that level. Thus, the orderblock can push the price away in case of a pullback.
Here are some visual examples of order blocks on TradingView charts:
Market Structure
Market structure is not a Smart Money specific term. But, it plays a vital role in many SMC trading strategies. Market structure is how we determine whether the price is moving bullish or bearish:
- Bullish market structure is when the price makes higher highs and lows.
- Bearish market structure is when the price makes lower highs and lows.
Here is an example of a bullish market structure:
The image below shows a bearish market structure:
Now that you have learned the basics of Smart Money Concepts, you might want to create an SMC strategy. As you already know, backtesting is one of the most essential steps in creating a trading strategy. If you want to test strategies, check out our review of the best Forex backtesting software tools in 2024.
Do Smart Money Concepts Really Work?
We have already covered the basics of Smart Money Concepts in this article. You are now familiar with what this method is about. Yet, it would be beneficial to hear from some traders whether these concepts work or not.
We searched Smart Money Concepts Reddit reviews. Skimming through SMC trading strategy reviews, we got interesting results. Reddit users have very different opinions about Smart Money trading. Some people are skeptical and doubtful. They believe many Smart Money Concepts forex mentors have no real experience.
They also argue attributing trading success to SMC could be random reinforcement. It does not result in an understanding of how markets work. Additionally, critics claim institutional trading uses complex strategies beyond the basic SMC models.
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SMC forex traders and supporters argue that it provides a useful analysis framework. They emphasize the importance of learning from specific trusted sources. ICT on YouTube is one such source.
Supporters dispute common misunderstandings about SMC. They agree that individual research and understanding of market mechanics are necessary. They also believe that applying SMC insights can contribute to a profitable strategy.
So, SMC is like any other trading strategy. Whether you will be successful or not depends on whether you learn the strategy well. You should also use a robust risk management system and control your emotions. Meanwhile, Smart Money Concepts might be worth giving a shot. Especially for traders who are still searching for a more convincing trading strategy.
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What are the Risks and Limitations of Smart Money Concepts?
As a trading strategy, using SMC has its fair share of risks and limitations. If you would like to learn Smart Money Trading, you should be aware of these risk factors:
- Subjectivity: The SMC trading strategy often involves discretionary analysis. This relies on the trader’s interpretation of market behavior. The resulting subjectivity can lead to inconsistencies in backtesting and live trading.
- Lack of Empirical Evidence: Many SMC concepts lack empirical or verifiable results. Traders should be cautious when adopting strategies that lack a solid track record. Relying only on theoretical concepts may not translate into profitable trading.
- Overemphasis on Market Manipulation: Some SMC promoters emphasize the idea of market manipulation. Make no mistake. Institutions do influence markets. Yet, attributing every price move to manipulation oversimplifies the dynamics of financial markets.
- Limited Risk Management Guidelines: Smart Money Concepts provides no guidelines for risk management. Effective risk management is crucial for long-term trading success. Moreover, relying only on market analysis without well-defined risk parameters is dangerous. It exposes traders to large losses.
- Not Suitable for Novice Traders: Beginner traders may struggle to apply SMC concepts. This leads to misinterpretations and poor decision-making. Traders might fall into a trap without a solid understanding of market mechanics. They would rely on surface-level patterns.
Check out the Fibonacci Trading Strategy if you are interested in more traditional trading methods.
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Conclusion
The world of retail trading is ever-evolving. Smart Money Concepts (SMC) have become the latest buzz in this landscape. As we have explained the basics of SMC, it is clear that it has sparked both enthusiasm and skepticism. The essence of Smart Money Trading is thinking contrary to traditional retail strategies. It focuses on understanding market makers’ moves. These are generally institutional entities like banks and hedge funds.
The origins of Smart Money Concepts are debatable. Figures like Michael J Huddleston, AKA Inner Circle Trader (ICT), are early preachers. Still, some critics argue that Smart Money Trading repackages existing concepts. like supply and demand. Still, the real litmus test for traders lies in its practical effectiveness. Reviews on platforms like Reddit showcase a spectrum of opinions. These range from skepticism about the substance of SMC teachings to relentless support. Followers also emphasize the importance of learning from credible sources like ICT.
Like any trading strategy, success depends on understanding the approach. Of course, coupled with robust risk management and emotional discipline. Smart Money Concepts may offer a unique framework for market analysis. It might be attractive for traders seeking a different strategy. So, studying smart money concepts could be worthwhile in finding profitable trading strategies.
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