Basic Introductory guide to Smart Money Concepts
Here we have created a simple SMC Guide on how we approach the Forex Markets using Smart Money Concepts.
This SMC Guide will help give you a basic understanding of how Smart Money Concepts can be utilised within trading.
Orderblocks / Supply & Demand
An Orderblock / Supply & Demand is an area of price where financial institutions and banks have collated their orders, to gain enough liquidity to push price in the direction they intend. (in the direction that follows the order flow planned by them) Think of it like a foot print the banks have left behind. We have all seen large movements in price on the charts no doubt, and these large movements often leave behind clues as to what the banks are doing. By looking at the way price makes an impulsive move, we can determine if it is a favourable place (position/area) to for a potential trade,
depending on a few characteristics, such as:
• Breaking a High / Low
• Leaving Imbalance
• Inducement (Creating liquidity, covered later on)
It is not necessary to have all 3, but the more of the above points that an Orderblock creates, the better. See examples below:
The movement from the Orderblock broke past the recent high before coming back to the Orderblock.
The movement from the Orderblock broke past the recent low before coming back to the Orderblock.
The Orderblock left behind unfilled price between the candle wicks. This often causes price to pull back to refill the gap that has been left behind.
Inducement is when price has been manipulated in such a way that it creates liquidity in areas that banks want to move price to and from. In the example above, you can see that an Orderblock was formed by an impulsive move, then price ranged for a bit. The $ symbols show where liquidity most likely lies and where banks will likely want to manipulate price before pushing upwards. Once price has swept the liquidity at the bottom of the range, it then can continue its move to the upside. We shall look into liquidity further on the next page.
Think of liquidity as how many buyers and sellers are present, and whether transactions can take place easily.
Example, if there is 10 people buying at £1, there needs to be 10 people selling for £1 for it to be a perfectly liquid market. Now on a much larger scale, there is on average $6.6 Trillion traded daily on the forex market. Yes Trillion. So in order for Banks, Hedge funds and other financial institutions to trade the large volumes they do each day, they need to manipulate the market by creating liquidity.
The way they do this, is by opening lots of Buy and Sell orders, and moving price to create, patterns and trends. This in turn induces other traders, like us retail traders or even other institutions to get into the market.
How we could use this to our advantage
Other traders stop losses and take profits that are set, are also a form of liquidity to the large financial institutions.
By knowing this, we can anticipate the likely areas most traders may have their targets set. If we take the most common trading strategies, such as trading pattern, trendlines candle stick pattern etc. We can then get a good idea where banks may push price to clear liquidity.
An entry model is combining confluences like, Orderblocks, Price Action and Inducement to optimise your entry into a trade. Perfecting this can allow you to be far more precise with your entries, and give you the option to use a tighter stop loss. Here are some of my favourite entry models to use when entering a trade.
In this example, an orderblock was created that broke the recent high. After an impulsive move, price consolidated, creating liquidity above and below the range. This entry model would be higher probability if liquidity below the range was swept 1st in order to hit the orderblock, leaving the liquidity above the range to give price a reason to push up. Vise versa for a bearish orderblock.
In this example, an orderblock was created that broke the recent high. After an impulsive move, price started to create lower highs and lower lows. This is inducing liquidity above the lower highs where it is likely that stop loses will be. The order block will need to be tapped into before sweeping the liquidity otherwise it will not be vaild. Vise versa for a bearish orderblock.
In this example, we have began with a range creating liquidity both above and below. Once liquidity has been swept, and tapped into the higher time frame (HTF) orderblock, we wait for a rejection of this area and a lower time frame (LTF) orderblock form creating our entry point. Vise versa for a bearish orderblock.
In this example, we have began with a range creating liquidity both above and below. Very much like the previous example, we have swept liquidity and pushed in the other direction and entered off the newly formed orderblock.
But in this example, the orderblock that caused liquidity to be swept from the range will likely become whats known as a breakerblock.
This can be thought of similar to how support and resistance use a break and retest method. The reason the breakerblock is there, is often both sides of the range need liquidity to be swept and the breakerblock is a great catalyst for fuelling that move.
I like to use breakerblocks as a scale in for a 2nd trade entry providing my original trade is above 1% profit and SL to entry.
We hope you find this SMC Guide useful. If you haven’t checked out our YouTube channel yet, we have also covered some of these topic in more detail.
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