Smart money concepts

Smart money is a name for banks, funds and other participants whose orders are large enough to move price. They cannot buy or sell their full size at one price. They need liquidity – many opposite orders in one place – and that need shapes how price moves.

Smart money concepts come from the teaching of ICT (Inner Circle Trader). They build on older ideas: Dow theory for trend, Wyckoff for accumulation and distribution, classic supply and demand zones. SMC gave them new names and a fixed order of use.

Everything starts with direction. Market structure is the sequence of swing highs and swing lows: higher highs and higher lows in an uptrend, lower highs and lower lows in a downtrend.

A break of structure (BOS) is a close beyond the last swing in the direction of the trend. It confirms the trend. A change of character (CHoCH) is the first break against the trend and is read as an early warning of a turn.

Liquidity is resting orders. Stop-losses and breakout orders collect above highs and below lows, most of all above equal highs and below equal lows. Buy stops above highs are called buy-side liquidity, sell stops below lows are sell-side liquidity.

A liquidity sweep is a move through such a level that triggers the stops and then reverses. In SMC it often marks the start of the real move.

An order block is the last opposite candle before a strong move that breaks structure: the last down candle before a rally or the last up candle before a drop. Its range is treated as a zone where large orders were filled. Traders watch for price to return to the zone and enter from it in the direction of the move.

A fair value gap (FVG) is a three-candle formation in which the first and third candles do not overlap. The range between them was traded by the middle candle alone. It is read as an imbalance, and price often comes back to it before the move continues. A gap usually sits right after an order block, so the two are used together.

The diagram above shows this sequence for a long trade. On Charts the Smart Money group has an indicator for each step: Smart Money Concepts, Market Structure (BOS and CHoCH), Liquidity Swings and Sweeps, Order Blocks and Breakers, Fair Value Gaps. They are included in Plus and Premium.

• Direction – read market structure on a higher timeframe and trade only with it.
• Liquidity – wait for price to sweep an obvious high or low against that direction.
• Confirmation – a strong move away from the sweep that breaks structure on the trading timeframe.
• Entry – on the return to the fair value gap or the order block left by that move.
• Stop – beyond the order block or beyond the extreme of the sweep.
• Target – the next pool of liquidity in the direction of the trade: a previous high for longs, a previous low for shorts.

SMC also splits the current range in half. The upper half is called premium, the lower half discount. The rule is to look for longs in discount and shorts in premium, so that an entry is not taken at the far end of a move. A Fibonacci retracement drawn over the range shows the 50% line.

• Treating the story as fact – nobody outside sees who placed which order. The concepts describe price behaviour, not the intentions behind it.
• Marking everything – low timeframes are full of gaps, blocks and small breaks. Zones matter when they come from a move that breaks structure.
• Skipping the higher timeframe – most failed entries are trades against the larger trend.
• Trading the names without testing – step through history in Replay mode and count how your rules performed before using them live.