Summary
Highlights
This section introduces Smart Money Concepts (SMC) as trading strategies employed by "smart money"—knowledgeable financial professionals, including banks and hedge funds. Their significant capital allows them to influence market movements, and understanding their strategies can help individual investors profit. SMC involves leveraging advanced market data and sophisticated analytical tools.
Market structure analysis helps predict future price movements based on past behavior. The market can be in an uptrend (consistent higher highs and higher lows), a downtrend (consistent lower lows and lower highs), or a sideways market/trading range (prices move without a clear direction). This section clarifies these states, emphasizing that trading ranges can occur within trends as consolidations.
Break of Structure (BOS) signals continue a trend (e.g., breaking a higher high in an uptrend). Change of Character (CHOCH) is a first warning that a trend might be ending, occurring when the price breaks below the most recent low in an uptrend or above the most recent high in a downtrend. The distinction between internal (lower timeframe) and external (higher timeframe) BOS and CHOCH is also explained, highlighting their fractal nature.
Strong levels originate from price movements that successfully break structure or establish a Change of Character, indicating significant market action. Weak levels, conversely, result from movements that fail to break structure, signifying less dominant market influence. Identifying these levels is crucial for understanding potential support and resistance.
Supply and demand are the driving forces behind all price movements. SMC identifies zones of imbalance where supply and demand are significantly skewed, known as supply and demand zones. These zones can be used as potential entry levels. The section details a step-by-step method for identifying a strong momentum candle, the preceding candle, and then drawing the zone based on these observations.
Combining market structure analysis with supply and demand concepts helps identify higher-quality zones. High-quality demand zones are typically found at 'strong lows' that caused a break of structure and exhibit a strong bullish momentum candle. Conversely, high-quality supply zones are identified at 'strong highs' that triggered a change of character, followed by a strong bearish momentum candle. Patience is key to waiting for price retests of these zones.
Fair Value Gaps (FVG) represent temporary market inefficiencies and imbalances between buyers and sellers, similar in concept to supply and demand zones but identified differently. They are created during large momentum candle movements. Traders use FVGs as potential entry points, expecting the market to 'fill' these gaps. The process involves identifying a strong momentum candle and the candles immediately before and after it to define the gap.
FVGs can be found in the middle of a move, not just at strong lows/highs. For bullish FVGs, the strategy involves waiting for the price to retest the FVG area and then looking for a bullish confirmation signal (e.g., a bullish hammer candlestick) for entry. Setting stop-losses below the FVG and target levels just below the previous high or using a fixed risk-to-reward ratio are common practices.
Liquidity zones are areas with high concentrations of orders (e.g., stop-loss orders). Smart money often manipulates prices to trigger these orders, creating liquidity for themselves. For instance, pushing the price below a support level to trigger stop-losses, then buying at a cheaper price to reverse the trend. This can also trigger more stop-losses from short positions when the market reverses, causing further buying pressure.
Liquidity grabs are often indicated by candlesticks that quickly wick below support or above resistance and then immediately reverse. This differs from a true change of character, which requires a candle close below/above the key level. A common entry strategy for a liquidity grab involves entering at the close of the candle causing the grab, placing a stop-loss beyond the wick of that candle, and setting a target based on a risk-to-reward ratio.