Introduction
In my previous article, I talked about how to use the SMC trading Strategy in your trading and gave a step-by-step guide to how you can best use the SMC strategy. Months after writing that article, I have gotten several questions regarding the Smart Money Concepts and its effectiveness in both forex and crypto trading.
This has therefore prompted the creation of this article. In this article, I want to simplify smart money concepts so that even a little kid can understand. You will notice that most of the information you can find online is about retail trading and basic price action moves like support and resistance strategies. If you search for how smart money and the big banks trade, you won’t find much information about it.
Today, smart money concepts of trading are one of the best-kept secrets in the world of trading, which is why many traders are doing all they can to get a deep understanding of this concept. In this article, we will review those secrets together. Once you learn how smart money works, you can easily implement these concepts into your trading style and make even more money.
Firstly I will be shedding more light on some of the basic smart money concepts you need to understand to integrate them into your trading style easily. After which, I will also use examples to illustrate the trading strategy properly.
If you are ready, grab your cup of coffee, sit if you are not yet seated, and ensure you have your notepad. See you at the end of this article.
Now, the Smart Money Concepts Trading Strategy is a simple trading strategy that uses basic trading concepts such as supply and demand, support and resistance techniques, etc, to analyze trade entry and exit positions. Some of the basic terms used in smart money concepts trading strategy include the following:
Basic Smart Money Concepts Guide
Break of Structure:
Firstly, let’s talk aboutBOSorBreak of Structure. In an uptrend market, price will look like what is shown in the diagram above. You’ll have your higher highs and higher lows every time price breaks through a new high. This is what we call a bullish break of structure orBOS. So looking at the diagram above, we have a break of structure in the areas marked with a red arrow.
Still looking at the diagram above, after the first break of structure, we can still find other BOS as indicated with the red arrows in the diagram above. This means whenever price breaks the previous high, it forms a new Break of Structure.
As we all know, price cannot continue moving in one direction forever, at some point in time, price will eventually lose momentum and start reversing in the other direction and for this reversal to be valid, price has to break the previous higher low or the last higher low in the case of an uptrend market.
Change of Character (CHOCH)
So this is the previous high low, and price has to break below it for it to be valid. Once this move has happened, this is what we call the Change of Character (CHOCH), as indicated in the diagram above.
In order for this Change of character (CHOCH) to be valid to work, we want this previous high to be an area of interest like either asupply or demand zoneor an order block. This means the stronger the supply and demand zone, the better it is, right? If you are following me, then you should know the answer already.
To make it clear, the stronger the demand or supply zone is, the more effective the change of character will be. In case you don’t have a deep understanding ofsupply and demand zones, you can read about them on this website also.
Looking at the diagram above, once we have a change of character, the CHOCH and an area of interest which can be your demand or supply zone, although in the case of the chart above, the supply zone is our area of interest, we can expect price to reverse and start going down, and as it starts to go down, it will create your lower highs and lower lows and lower highs and lower lows.
As price creates your lower highs and lower lows, it will also create your bearish break of structure (BOS) whenever price breaks through a lower low. When price breaks through a lower low, it creates another break of structure right here.
Looking at the diagram above, we can see the bullish break of structure.
The diagram above indicates our bearish break of structure.
The diagram above indicates our change of character.
At some point in time, this downtrend will start losing momentum like this uptrend right here, it will start reversing back up and this will create your change of character right as indicated in the above diagram.
This is pretty much the whole concept of using the smart money concepts strategy, the break of structure, and the change of character.
Area of Interest
In other for this strategy to work, we want the area of interest, this zone in red, which is also known as the supply and demand zone, to be as strong as possible because the stronger it is, the more likely the price will move in the direction that you want it to. Now, what do I mean by a strong area of interest? These are price levels where the market is likely to make a significant change in direction due to the immense number of orders/liquidity.
There are two methods that you can use in identifying a strong area of interest. The first method is what we call the liquidity grab at a supply or demand zone. Firstly, you need to identify a strong supply or demand zone on a higher time frame, like the 1-hour time frame or above, as mentioned in the previous article I wrote here onSMC trading strategy.
So the higher the time frame, the stronger the area of interest will be, please note this is very important, which is why I have mentioned it in all my articles involving the supply and demand zones, the next thing you should be looking out for is your liquidity grab.
Liquidity Grab
Now you might ask, what is a liquidity grab? Before we go further, let me define that. Liquidity grab is basically a false breakout, right in this case, where Price breaks through a recent high or low, does a fake out like in the diagram above, and then reverses in the opposite direction.
The psychology behind this liquidity grab is that people will be entering a sell position when Price breaks through the recent low because this is the recent low and when price breaks through the recent low, the sellers will be selling down because they think that this is a downtrend. This can be seen in the diagram above also.
Now, when they enter for a sell right here, as shown in the diagram above, they will place their stop loss above the last lower high, which is right here. So if price ends up doing a false breakout and price actually comes up, it will hit all their stop losses, adding fewer to the fire and increasing the momentum, causing Price to shoot up.
At this point, we can take advantage of this by entering a buy position right after the bullish candlestick as indicated in the diagram above, using the bullish engulfing candlestick pattern as a confirmation. This is because this candlestick pattern tells you that the buyers are largely in charge of the market at the moment. You can read more about candlestick patterns in one of my articles. From the chart above we can see that price continued the upward momentum for quite some time.
Order Blocks
The second method for finding a key area of interest is using order blocks (OB). This is also the most common method used by smart money concept traders. An order block is basically an area where the smart money and big banks like to enter and exit. Now the next step is finding or spotting the order blocks. You can spot order blocks by looking for strong reversals, as illustrated by the three yellow arrows in the diagram below.
From the above diagram you can see that whenever price goes up to the horizontal line, it reverses down strongly and when price comes back down, it reverses back up strongly. The levels indicated in the above diagrams by the white horizontal lines are what we call the order blocks.
Smart Money Concepts Trading Strategy
Now we should have properly understood some of the complex but common terms used in smart money concepts trading as I have used some pictorial illustrations to simplify and explain them showing you how they can be identified. Let’s take it a step further by combining what we have learned so far with examples as I show you a high-win-rate smart money trading strategy.
While using this strategy, make sure that you are using a higher time frame, as I have mentioned several times now, like the 1-hour time frame, because the first thing to do before you do any other thing is to mark up your key levels or supply and demand zones by finding where price is reversing or respecting.
Looking at the diagram above, we can see that at this point, price retested this particular zone about four times making this a very strong supply zone, therefore, I can draw another demand zone at this key support area right here as indicated in the diagram below.
Now I’m going to show you this strategy on GBP USD, the great British pound against the US dollar.
Looking at the diagram above, we can see that there’s a support area right around this area here because whenever Price comes back down here, it always reverses and it does this more than once, confirming the fact that price has been respecting the demand zone, or the support level, depending on what you like to call it.
Over here, Price gave us a liquidity grab, so the first thing you want to look for is for Price to give us a liquidity grab or a force breakout at a supply or demand zone, which is precisely what Price gave us in the diagram above. Price broke through the support level/demand zone and then it just went back up. This was an obvious false breakout, or what we like to call a liquidity grab. Now, you can even mark up your break of structure here, and the next thing you want to look for is a change of character.
Getting to this point of the article means you find it helpful and I appreciate that. To continue reading, kindly read the full articlehereas the article is lengthy, and there is still a lot to learn. You can also visithttps://www.dipprofit.com/smart-money-concept-trading-for-beginners/to read the complete article.
You can also download the smart money concepts pdf file here to get the full article in pdf format for offline reading and its free.
You can also comment and like if you find this article useful. Thanks, and have a great trading week.
