Summary:
Adding Smart Money Concepts (SMC) to your trading plan means looking at the actions of large, informed investors to predict market trends. This strategy supports good trading choices by finding key indicators like order blocks and market structure breaks.
Main Points:
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- Smart Money: Refers to capital held and used by major investors with serious knowledge and influence.
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- Indicators of Smart Money Activity: Order blocks, accumulations/distributions, and market structure breaks.
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- Applying SMC in Trading: Use technical analysis to follow smart money actions for better trading choices.
You may have heard the term “smart money” before, whether in investing, trading, or a totally different context.
This phrase has its roots in betting. However, it has come to mean an informed or expert opinion about the outcome of a future event. The Cambridge Dictionary shares examples of smart money used to refer to athletics and business.
Today, we’ll focus on one use of smart money — its meaning in markets and trading. So, what are smart money concepts and terms? How can you add them to your trading strategy? Let’s dive in.
Smart Money Concepts in Forex and Trading
The Corporate Finance Institute shares a simple and clear definition of smart money in trading that gets to the heart of this idea. “Smart money refers to the capital that institutional investors, central banks, and other professionals or financial institutions control.”
These investors trade day in and day out, building deep market knowledge and learning how to find valuable chances to earn a profit.
Smart money investors know their chosen markets and the entities related to them, like companies and governments. Smart money traders have both market knowledge and powerful connections that may provide inside or early info. So, the trades they choose to make are informed by complex and effective strategies, as well as deep knowledge of both trading and the assets on which they focus.
Also, these investors control large amounts of money and assets. They often make large orders. This volume of activity can lead to changes of asset prices.
Investopedia shares two key facts about smart money, helping us understand its impact and past performance:
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- The general wisdom is that smart money makes more informed trading choices. Their position is thought to lead to better results when compared to single traders, even highly skilled ones.
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- There is not much strong proof that smart money truly performs better than other investors. Smart money has its limits. However, its effect on the market in terms of large orders and guiding other traders is clear.
As we’ve previously explained, the smart money concept can help traders by serving as a sign of likely market changes. “By observing the actions of the smart money, traders can gain insights into market sentiment, trends, and price movements, and use this information to their advantage.”
In most cases, the goal is to follow or act on smart money market changes early on. Trading before a trend peaks or begins to reverse can lead to more trading success.
How Does the Smart Money Concept Work for Trading Forex and Other Assets?
Now, we know what smart money is in trading. That makes it much easier to look more closely at using the smart money concept in your own trades.
Keep in mind that the smart money concept is not exactly the same as many other basic strategies and tools for trading. Traders who follow the smart money look at price charts and other indicators to learn how smart money investors act.
In other words, the smart money concept involves analysis, but not of assets or the entities tied to them. Instead, it’s all about looking at other investors’ actions.
Of course, you can combine other types of analysis — like fundamental and technical analysis — and strategies with the smart money concept. You could, for example, follow your normal trading strategy. Then, add a step where you compare smart money trading with the action your strategy suggests, and then make changes as needed.
So, how can you find smart money concepts in action? Looking at these indicators, among others, can help.
Reviewing Order Blocks
Order blocks or large orders are often placed by large investors. They show clear intent and confidence on the part of the investor and can impact the market. Finding very large order blocks soon after they’re placed can allow traders to hop onto a trend at its starting point. That may lead to substantial gains.
Identifying Accumulations and Distributions
Smart money traders look for assets that are undervalued or overvalued and act on that chance to earn a positive return. The in-depth knowledge and major buying and selling power of those large traders can help to kick off an uptrend or downtrend.
Individual traders can use technical analysis to identify accumulations and distributions and look at activity around such assets. In cases where large order blocks are placed, those accumulations and distributions may show the smart money position for an asset.
Analyzing Market Structure and Breaks of Structure
Using technical analysis tools, like trend lines and chart patterns, traders can find points where an asset starts an uptrend or downtrend.
A break of structure happens when an asset moves past an established high or low over a given time period. This is often the sign of the start of a new trend. This could be a rise over the highest high prices or a drop below the lowest low prices.
Those structure-breaking price changes may be due to the actions of market makers — the smart money traders. Their advanced analysis and deep experience can clue them into market changes before other traders find them.
Putting Smart Money Concepts to Work
Smart money traders rarely share the logic behind their actions. They don’t advertise their recent activity. However, the signs of this activity can be made clear with technical analysis.
For individual traders, looking at the actions of smart money investors can help to reveal their likely motives and impact on the market.
Remember that following the smart money does not always mean success. There is always risk in trading no matter the strategy. Yet, following smart money activity can offer more context to better inform choices. It can help you predict the impact of large traders on markets.
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