Increase the difficulty level on yourself. Often, traders like to make things a lot harder for themselves than they need to. Everyone is seeking a silver bullet, truth is "less is actually more".
Dow Theory is actually the Grandfather of technical analysis.
If you have never heard of this, or even if you have and brushed over it, you are missing out.
Some people will say things like "it's over 100 years old it can't work in today's market"
Yet, humans have changed very little in those last 100+ years. Sentiment driven by fear and greed is where the secret is hidden.
Let me explain by saying Dow theory has 6 "rules" (tenets).
1) Market Moves in Trends Markets have three types of movements: primary trends (long-term trends that last for years), secondary trends (medium-term trends that retrace parts of the primary trend), and minor trends (short-term trends that are typically noise).
You will notice I used the weekly for the larger and the daily for the second.
When I journal my trade setups; I simply use a traffic light system red lines size 4 for primary, then orange line 3 for secondary and green size 2 for the trigger phase. In addition to that, I mark the trends with 3 boxes and arrows pointing up down or sideways.
The second rule;
Each trend has three phases:
Accumulation Phase. In this phase, informed investors start buying or selling, counter to the general market opinion.
Public Participation Phase, more investors notice the trend after it is already underway, and media coverage expands, driving the trend further. (Wyckoff called this a mark-up or mark-down phase)
Excess Phase (or Distribution): At this point, speculation is rampant and detached from actual value, leading informed investors to prepare an exit.
This is where a lot of Wyckoff, Elliott and other tools such as Smart money concepts all overlap.
Then, the 3rd rule.
The market reflects all available information, such as economic conditions and sentiment. Therefore, movement in the market averages considers and reflects this information. (in simple terms, discount the news).
4) For a trend to be validated, different market averages must confirm each other. For example, the trend in the Dow Jones Industrial Average should be confirmed by the Dow Jones Transportation Average. If one index moves to a new high or low, the other should follow suit to confirm the trend.
(I like this one less, but in some instances it can make the next move very obvious.)
Rule 5) The trend is your friend, until the end. Until you see a clear change in the direction, a market shift. The trend is still in play. This one, I feel most just can't comprehend.
As you can see below, I have marked up the extreme high and low, I know both my primary and secondary trends are down. So now, I can use my EW bias or start looking for a Wyckoff schematic. (if I believe we are about to see a shift in the trend.)
You can start to look for information for areas of interest, look into volume and volume profiles.
The last rule. Confirming the trend volume expanding in the direction of the primary trend. For an uptrend, volume should increase as prices rise and decrease during corrections. In a downtrend, volume should increase as prices fall.
In this example, the Fibonacci levels line up, the volume is slowing, the EW count makes some sense and zoomed out you can see a shift.
Now, with all of this info - we could look at "areas of interest"
We are in a demand zone on the higher time frame.
At this stage, there is no trade entry, but if we were to view a change in the character we could simply take a trade as a pullback on the primary trend down.
Something like this;
You see, all you are doing is following the trend and taking a look at other tools, auction areas, fib extensions, an EW bias, and hints of a Wyckoff schematic. But under the hood, the 3 trend principle is a simple-to-follow process.
Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years' experience in stocks, ETF's, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.
Smartmoneyconcept
Smart Money Concept and How To Use It in TradingSmart Money Concept and How To Use It in Trading
In the world of forex trading, understanding the movements and strategies of the market's most influential players like banks and hedge funds—termed "smart money"—can provide retail traders with a significant advantage. This FXOpen article offers a deep dive into the Smart Money Concept, discussing how institutional investors influence market trends and how retail traders can align their strategies with these market movers for potentially better outcomes.
Understanding the Smart Money Concept
The Smart Money Concept (SMC) centres on the principle that the movements of large institutional investors in financial markets can offer valuable clues to retail traders about future market trends.
These institutional investors, often referred to as “smart money,” include banks, hedge funds, and investment firms, wielding significant capital power to influence market directions. The core of SMC lies in the belief that by observing and understanding the trading behaviours and patterns of these entities, retail traders can align their trading strategies to potentially tap into more favourable results.
In essence, SMC is not merely about following the “money” but understanding the strategic placements and movements of these large volumes of capital. Institutional investors typically conduct extensive research and possess a deep understanding of the market dynamics before making substantial trades.
Their actions, therefore, are often indicative of a broader market sentiment or an impending significant market move. By deciphering these signals, retail traders can gain insights into market trends before they become obvious to the wider market.
Understanding SMC requires a shift in perspective from focusing solely on technical indicators and price action to considering the market's psychological and strategic elements. For retail traders, leveraging the Smart Money Concept means navigating the market with a more informed approach, using the trails left by institutional investors as a path to smarter trading decisions.
Ideas in Smart Money Concept
The Smart Money Concept introduces several foundational ideas that provide traders with a framework to interpret market movements through the lens of institutional activities.
Order Blocks
Represent areas where institutional investors have placed significant orders, usually in the form of a range. These blocks often precede a strong market move in the direction of the block, serving as a signpost for areas of interest to “smart money.” When the price returns back to this zone, it’ll often reverse (similar to an area of support or resistance).
Breaker Blocks
These are essentially failed order blocks. When an order block fails to hold the price, it breaks through, potentially indicating that the “smart money” direction has changed. When the price breaks above or below the order block, it can then act as a barrier for prices in the future (similar to the way an area of support can become resistance and vice versa).
Breaks of Structure (BOS)
A BOS occurs when the price surpasses a significant high or low, indicating a potential change in market trend. It signifies the end of one market phase and the beginning of another, offering clues about “smart money”’s influence on market direction. Recognising BOS can be crucial for determining trend direction.
Change of Character (ChoCH)
This concept refers to a notable alteration in the market's behaviour, often seen through an abrupt increase in volatility or a shift in price direction. A ChoCH usually follows a BOS, confirming a potential trend reversal and suggesting a new phase of market sentiment driven by institutional activities.
Fair Value Gaps (Imbalances)
These gaps represent areas on the chart where price moves quickly through, leaving a gap that indicates an imbalance between supply and demand. Institutional traders often target these gaps for potential returns, so prices tend to move back to fill them over time.
Liquidity
In the context of SMC, liquidity refers to the areas where “smart money” is likely to execute large orders due to the availability of opposite market orders. These are areas where stop losses and stop orders (to capture a breakout) are likely resting, usually around key highs or lows, trendlines, and equal highs/lows. The concept states that “smart money” is likely to push the price into these areas to execute large orders before the true market direction unfolds, as in a bull or bear trap.
Accumulations/Distributions
These phases indicate the period during which “smart money” is either accumulating (buying) or distributing (selling) their positions. Rooted in the Wyckoff theory, an accumulation occurs at lower price levels, often before a significant uptrend, while distribution takes place at higher price levels, typically before a downtrend. Identifying these phases can provide insights into the future market direction favoured by institutional investors.
Steps to Trade Smart Money Concepts in Forex
Trading SMC requires a nuanced understanding of market dynamics and the ability to interpret signs of institutional involvement. Below, we’ll take an overview of the approach. Traders can apply these steps to real-time forex charts on FXOpen’s free TickTrader platform.
Determining the Trend Using Breaks of Structure (BOS)/Change of Character (ChoCH)
Traders can identify the market trend by observing BOS and ChoCH. A trend is typically recognised by a series of higher highs/higher lows (uptrend) and lower lows/lower highs (downtrend).
Trend continuation is seen when there's a clear BOS, where the price surpasses a significant high or low, signalling a shift in market direction. Following this, a ChoCH, an abrupt change in market behaviour, may confirm the new trend. Identifying these elements allows traders to align with the market's momentum, providing a strategic framework for setting a direction.
Identifying an Order Block
The next step involves pinpointing areas where institutional traders are likely participating, often signalled by a BOS or ChoCH. Traders look for the range that initiated this shift (marking an order block), with increased odds of accuracy if there's a pronounced move away from the range to create a fair-value gap or if it aligns with a breaker block.
The presence of liquidity near these points, or if it was targeted to initiate the BOS or ChoCH, can further validate the significance of the order block. This phase is crucial for understanding where large volumes of trades are being placed and where the price may revisit before continuing the trend.
Finding an Entry Point
Once an order block is identified, finding a strategic entry point becomes the focus. Traders typically either position limit orders at the edge of the block or await specific candlestick patterns, such as hammers, shooting stars, or engulfing candles. These signals suggest a possible continuation of the trend, providing a cue for entry. However, other tools, like Fibonacci retracements or indicators, can also be used to identify an entry point within SMC.
SMC vs Price Action
The Smart Money Concept and price action are both popular trading strategies, yet they approach the market from distinct angles. Price action focuses on analysing past and present price movements to identify patterns or trends without considering external factors. It relies heavily on candlestick patterns, chart formations, and support and resistance levels, making it a strategy based on the technical aspects of trading. This approach is favoured for its simplicity and direct reliance on price data, allowing traders to make decisions based on the immediate market environment.
On the other hand, SMC trading delves deeper into the underlying market dynamics, emphasising the influence of institutional investors or “smart money.” It seeks to identify where these major players are likely to enter or exit the market, using concepts like order blocks, liquidity zones, and fair value gaps. Smart money strategies are grounded in the belief that understanding the actions of institutional traders can give retail traders insights into potential market movements before they become apparent to the wider market.
While price action is straightforward and relies purely on technical analysis, SMC incorporates a more strategic view, considering the psychological and strategic manoeuvres of the market's most influential participants.
Traders might find price action appealing for its clarity and focus on the charts, whereas SMC offers a deeper, albeit more complex, analysis of market forces. Integrating the two can provide a comprehensive trading strategy, leveraging the simplicity and technical focus of price action with the strategic depth offered by SMC.
The Bottom Line
The Smart Money Concept bridges the gap between retail traders and the elusive strategies of institutional investors, offering a structured approach to deciphering market movements. By understanding and applying SMC principles, traders can navigate the forex market with potentially greater insight and confidence. Opening an FXOpen account provides an excellent avenue for traders eager to apply these advanced concepts in a live trading environment, setting the stage for more informed and strategic trading decisions.
FAQs
What Is the Smart Money Concept?
The Smart Money Concept (SMC) is a trading strategy focused on understanding and leveraging the market movements initiated by institutional investors, such as banks and hedge funds. It posits that by identifying the trading behaviours of these major players, retail traders can make more informed decisions.
What Is SMC Strategy in Trading?
The SMC forex strategy involves identifying patterns and signals that indicate the involvement of institutional investors. This includes analysing order blocks, liquidity zones, breaks of structure (BOS), changes of character (ChoCH), and fair value gaps. By aligning with these signals, traders aim to position their trades in harmony with the actions of the “smart money.”
Which Timeframe to Use for SMC Trading?
The choice of timeframe in SMC trading should align with the trader's goals and strategy. Short-term traders may prefer 1-hour or 4-hour charts for quicker insights, while long-term traders might opt for daily or weekly charts to capture broader market trends influenced by institutional movements.
Is SMC Better Than Price Action?
SMC and price action cater to different aspects of market analysis. While a smart money strategy focuses on institutional movements, price action concentrates on the patterns formed by the price itself. Neither is inherently better; their effectiveness depends on the trader's strategy, market understanding, and comfort with the concepts. Integrating both can offer a comprehensive approach to market analysis.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Learn 7 Types of Liquidity Zones in Trading
In the today's article, we will discuss 7 main types of liquidity zones every trader must know.
Just a quick reminder that a liquidity zone is a specific area on a price chart where a huge amount of trading orders concentrate.
Read carefully, because your ability to recognize and distinguish them is essential for profitable trading.
1. Fibonacci Zones
The zones based on Fibonacci levels can concentrate the market liquidity.
Classic Fibonacci retracement levels: 0,382; 0,5; 0,618; 0.786
and Fibonacci Extension levels: 1,272; 1,414; 1,618 attract market participants and the liquidity.
Above, you can see an example of a liquidity zone based on 0,618 retracement level.
The reaction of the price to that Fib.level clearly indicate the concentration of liquidity around that.
Also, there are specific areas on a price chart where Fibonacci levels of different impulse legs will match.
Such zones will be called Fibonacci confluence zones.
Fibonacci confluence zones will be more significant Fibonacci based liquidity zones.
Above, is the example of a confluence zone that is based on 0,618 and 0,5 retracement levels of 2 impulses.
The underlined area is a perfect example of a significant liquidity zone that serves as the magnet for the price.
2. Psychological Zones
Psychological zones, based on psychological price levels and round numbers , quite often concentrate the market liquidity.
Look at a psychological level on WTI Crude Oil. 80.0 level composes a significant liquidity zones that proved its significance by multiple tests and strong bullish and bearish reactions to that.
3. Volume Based Zones
The analysis of market volumes with different technical indicators can show the liquidity zones where high trading volumes concentrate.
One of such indicators is Volume Profile.
On the right side, Volume Profile indicate the concentration of trading volumes on different price levels.
Volume spikes will show us the liquidity zones.
4. Historic Zones
Historic liquidity zones will be the areas on a price chart based on historically significant price levels.
Market participants pay close attention to the price levels that were respected by the market in the past. For that reason, such levels attract the market liquidity.
Above, you can see a historically significant price level on Silver.
It will compose an important liquidity zone.
5. Trend Lined Based Zones
Quite often, historically significant falling or rising trend lines can compose the liquidity zones.
Above is the example of an important rising trend line on GBPJPY pair.
Because of its historical significance, it will attract the market liquidity.
Trend lined based liquidity zone will be also called a floating liquidity area because it moves with time.
6. Technical Indicators Based Zones
Popular technical indicators may attract the market liquidity.
For example, universally applied Moving Average can concentrate huge trading volumes.
In the example above, a floating area around a commonly applied Simple Moving Average with 50 length, acts as a significant liquidity zone on EURJPY.
7. Confluence Zones
Confluence zones are the liquidity zones based on a confluence of liquidity zones of different types.
For example, a match between historic zones, Fibonacci zones and volume based zones.
Such liquidity zones are considered to be the most significant.
Look at the underlined liquidity zone on US100 index.
It is based on a historical price action, psychological level 17000, significant volume concentration indicated by volume indicator and 618 Fibonacci retracement.
Always remember a simple rule: the more different liquidity zone types match within a single area, the more significant is the confluence zone.
Your ability to recognize the significant liquidity zones is essential for predicting the market movements and recognition of important reversal areas.
Liquidity zones are the integral element of various trading strategies. Its identification and recognition is a core stone of technical analysis.
Study that with care and learn by heart all the liquidity types that we discussed today.
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SMART MONEY CONCEPT EXPLAINEDThe Smart Money Concept (SMC) involves understanding the behavior and strategies of institutional investors to inform trading decisions. Within SMC, there are several key components and strategies, including concepts like CHoCH (Change of Character), BOS (Break of Structure), FVG (Fair Value Gap), and others. Here's an in-depth explanation of these concepts:
1. Change of Character (CHoCH)
Definition
CHoCH refers to a significant shift in market sentiment or trend. It's a point where the market changes direction, indicating a potential reversal.
Identification
Higher Highs to Lower Lows (or vice versa): In an uptrend, CHoCH occurs when the market stops making higher highs and starts making lower lows, signaling a possible downtrend.
Volume and Momentum Shifts: Increased volume or momentum in the opposite direction can also indicate a change of character.
Application
Entry/Exit Points: CHoCH helps traders identify potential entry and exit points by signaling when a trend might be reversing.
2. Break of Structure (BOS)
Definition
BOS occurs when the price breaks a significant support or resistance level, indicating a continuation or reversal of the trend.
Identification
Support/Resistance Levels: When price breaks these levels with strong momentum, it signals a BOS.
Swing Highs and Lows: A break above a previous swing high or below a previous swing low is considered a BOS.
Application
Trend Confirmation: BOS helps confirm the direction of the trend, allowing traders to align their trades with the prevailing market direction.
3. Fair Value Gap (FVG)
Definition
FVG represents a price gap left in the market where there was a rapid price movement, often due to high volatility or significant market orders.
Identification
Price Gaps: FVGs are visible as gaps on the price chart where little to no trading occurred.
Imbalance Zones: These are zones where the buying and selling are not balanced, leading to rapid price movement.
Application
Retracement Points: FVGs often act as magnets for price, as the market tends to revisit these gaps to fill them, providing potential retracement or entry points for traders.
4. Other Major Parts of the Smart Money Concept
Liquidity Pools
Definition: Areas in the market where a large number of orders are clustered, typically around key support and resistance levels.
Application: Institutions often target these areas to trigger stop-loss orders, creating liquidity for their trades.
Order Blocks
Definition: Consolidation areas where institutions place large buy or sell orders, creating a base for future price movement.
Identification: These are visible as zones of consolidation on the chart.
Application: Order blocks can act as strong support or resistance levels, providing potential entry or exit points.
Institutional Candles
Definition: Large candlesticks that represent significant institutional activity.
Identification: These candles are usually much larger than the surrounding ones and often occur at key levels.
Application: They signal strong buying or selling interest from institutions, indicating potential future price direction.
Stop Hunts
Definition: The practice where institutions push the price to trigger stop-loss orders placed by retail traders to create liquidity.
Identification: Sudden, sharp price movements towards obvious stop-loss levels.
Application: Recognizing stop hunts can prevent premature exits and provide entry points at better prices.
Market Cycles
Accumulation Phase: Period where smart money is building positions, often characterized by sideways price movement with low volatility.
Mark-Up Phase: After accumulation, the price starts to move upward rapidly as institutions push the market in their favor.
Distribution Phase: Institutions begin to offload their positions, leading to sideways movement with high volatility.
Mark-Down Phase: Following distribution, the price moves downward rapidly as institutions sell off their positions.
Profitable Multiple Time Frames Smart Money Strategy Revealed
In this post, I will share with you a very accurate SMC strategy that combines top-down analysis, liquidity, imbalance, order block and inducement.
Step 1 - Identify liquidity zones on a daily
Liquidity zones are the areas on a price chart, where big players are placing their orders. From such areas, significant bullish and bearish movements initiate.
Liquidity zones that are above the current price will be the supply zones, while the liquidity zones that are below the current price will be the demand zones.
We will look for shorting opportunities from supply areas and for buying opportunities from demand zones.
Here are the liquidity zones that I identified on EURJPY.
Step 2 - Wait for a test of one of the liquidity zones
Let the market test the liquidity zone.
For buying, the price should reach a lower boundary of a demand zone.
For shorting, the price should test an upper boundary of a supply zone.
I underlined the exact levels that the price should test on EURJPY.
Here is the test of the lower boundary of the demand zone.
Step 3 - Look for inducement on an hourly time frame
With the inducement, smart money make the market participants think that the liquidity zone that the price is testing doesn't hold anymore.
When the price tests a supply area, an hourly candle close above its upper boundary will be a bullish inducement.
With that, the smart money incentivize buying orders.
When the price tests a demand area, an hourly candle close below its lower boundary will be a bearish inducement.
With that, the smart money incentivize selling orders.
The price closed below a lower boundary of a demand zone on EURJPY on 1H time frame.
Step 4 - Look for imbalance on an hourly time frame
After a violation of a supply area on an hourly time frame, look for a bearish imbalance.
Bearish imbalance is a strong bearish candle with wide range and big body. With that candle, the market should return within a supply zone and closed within or below that.
After a violation of a demand area on an hourly time frame, look for a bullish imbalance.
Bullish imbalance is a strong bullish candle with wide range and big body. With that candle, the market should return within a demand zone and closed within or above that.
Here is the example of a bullish imbalance on EURJPY.
After a bearish inducement, the price formed a high momentum bullish candle and closed within the demand zone.
The imbalance signify that a liquidity zone violation was a trap . With that, smart money simply was trying to grab the liquidity.
That will be a signal for you to open an order.
Step 5 - Look for an order block
After the formation of the imbalance, the market becomes locally week and quite often corrects to an order block.
Order block will be the closest hourly liquidity zone.
After a formation of a bearish imbalance, look for a supply zone on an hourly time frame. That will be your perfect zone to sell.
After a formation of a bullish imbalance, look for a demand zone on an hourly. That will be your area to buy from.
Here is the order block on EURJPY.
Step 6 - Set a limit order
Set a sell limit order within a supply area after a formation of bearish imbalance on an hourly time frame.
Set a buy limit order within a demand area after a formation of a bullish imbalance on an hourly.
Here is your buy entry level on EURJPY.
Step 7 - Select the target
If you sell, your target should be the closest daily structure support: horizontal or vertical one.
If you buy, your target should be the closest daily structure resistance: horizontal or vertical one.
In our example, our closest structure resistance if a falling trend line.
Step 8 - Set stop loss
If you sell, stop loss will lie above a bullish inducement.
If you buy, stop loss will lie below a bearish inducement.
Here is a perfect point for a stop loss for a long trade on EURJPY.
Step 9 - Trade
Let the price trigger your entry, and then be prepared to wait.
It took many days for EURJPY to reach the target.
Trading Tips:
1. Make sure that you have a positive reward/ratio. It should be at least 1.2
2. Risk no more that 1% of your trading account per trade
Being applied properly, that strategy shows 70%+ accuracy.
Try it by yourself and let me know your results.
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MARKET STRUCTURE USING SMART MONEY CONCEPT (ICT)The market structure, when viewed through the lens of the smart money concept, refers to the way financial markets operate and how price movements are influenced by institutional investors, or "smart money." These entities, such as banks, hedge funds, and large financial institutions, have significant capital and access to superior information, allowing them to impact market prices and trends. The smart money concept suggests that these institutions leave discernible footprints on price charts, which can be identified through patterns like accumulation and distribution, liquidity hunts, and manipulation of key support and resistance levels. Traders who understand and recognize these patterns can potentially align their strategies with the smart money, improving their chances of making profitable trades by following the sophisticated moves of these influential market participants.
Smart Money Concept: A Focus on Liquidity and Trade ExecutionSmart Money Concepts (SMC) empower traders to understand the invisible hand of institutional players ("smart money") in markets. By analyzing liquidity, the lifeblood of price movements, SMC equips you to anticipate potential breakouts and identify high-probability entry points. Let's dive into key concepts:
Liquidity Types:
● ERL (External Range Liquidity) : Areas of past significant price swings (highs and lows), attracting orders and potentially acting as support/resistance. Look at Previous Day/Week/Month H/Ls and Previous Trading Sessions H/Ls (Aisa, London, & NY)
● IRL (Internal Range Liquidity) : Areas within the current trading range where the price paused or reversed, indicating potential order clusters, like FVGs.
Price moves from one Liquidity Zone (ERL) to the other (IRL) & vice versa!
Price Zones:
● Premium/Discount Array : Based on the recent price leg, calculate the 50% midpoint (fair value) and extend 50% above and below to create a high-probability trading zone in regards to where the price should be going next, for example, if the price is in the lower part of the recent leg, then we should expect a move back into the Premium Array.
Highs & Lows:
● LTH/LTL (Long Term High/Low) : Turning points over longer timeframes, often acting as strong magnets for price.
● ITH/ITL (Intermediary Term High/Low): Significant swing points, usually highest / lowest point when the price reaches an imbalance zone.
● STH/STL (Short Term High/Low): Recent swing points within the current trading range, acting as potential pivots, you will find those on both sides of the ITL/L.
Identifying Imbalances:
● Gaps: Unfilled price spaces suggest imbalanced supply/demand, potentially leading to price retracements to fill the gap.
● FVG (Fair Value Gaps): Areas where price gapped through support/resistance, leaving an "unfair" imbalance, attracting corrective moves to rebalance price.
Trade Execution:
● OTE (Optimal Trade Entry): Look for confluences of various SMC elements (liquidity zones, imbalances, price patterns) for high-probability entry points that match the 61.8 / 70 Fibonacci levels.
● Kill Zones: Increased volatility during major market openings (London, New York) can offer high-risk, high-reward opportunities. This is when you should be trading!
Remember:
● SMC is a complex framework, master each element before combining them for strategic analysis.
● Backtest and paper trade your SMC strategies to build confidence before risking real capital.
● Market dynamics are fluid, adapt your analysis and trade execution based on evolving price action.
By understanding these SMC concepts and their interplay with liquidity, you'll gain a good understanding of market movements and improve your trade execution. Remember, practice, patience, and disciplined risk management are crucial for success in any trading strategy.
The Contraction, Expansion, and Trend PhaseContraction, Expansion, and Trend Phase
*also known as the Forex Master Pattern *
The contraction, expansion, and trend phase, or the Forex master pattern, is a trading methodology that focuses on identifying and capitalizing on the recurring patterns and phases that occur in the markets. They are based on the concept of these three market cycles.
Institutional players play a significant role in shaping these market cycles observed in the markets.
1.Contraction Phase
This phase represents a period of low volatility and consolidation in the markets
During contraction phases, institutional players often accumulate positions and establish their trading biases.
Institutional accumulation during this phase can create the necessary liquidity and order flow for a breakout in the subsequent expansion phase.
2. Expansion Phase
The expansion phase occurs when market volatility increases and the market breaks out of consolidation, leading to bigger price movements.
Institutional players execute their strategies by inducing price movements to entice retail participation. Depending on their goals, institutions may manipulate prices upward or downward, creating liquidity for their trades while taking advantage of retail sentiment.
Institutional buying during this phase can increase the movement in price and volatility, leading to rapid changes in markets and trends.
3. Trend Phase
Once the market establishes a clear direction following the breakout, it enters the trend phase.
The trend phase marks the end of the contraction, expansion, and trend phases, which are marked by sustained directional movements powered by institutional profit-taking activities. Retail traders often find themselves on the wrong side of the trade during this phase, triggering panic, liquidations, and potential market reversals.
The panic caused in this phase can eventually lead to liquidations.
While this is not a strategy, it is a versatile methodology that works on any timeframe and assets as long as it has enough volume on the market. You can develop many different types of strategies using the Contraction, Expansion, and Trend Phase .
ICT Kill Zones Time Asia London New YorkIn the fast-paced world of forex trading, timing is everything. While the forex market operates 24 hours a day, not all hours offer the same trading opportunities. That’s where ICT Kill Zones Times come into play. Forex kill zones are the time when high probability trading setup formed
These strategic time frames can open up a world of possibilities for traders who know how to leverage them. In this post, we’ll explore the concept of ICT Kill Zones ‘ times and how they can lead to high-probability trade setups and potential profits.
The ICT Asian Kill Zone Times: The Dawn of Opportunities
The Asian Kill Zone is the first of the strategic periods in the forex market. It is particularly relevant for traders dealing with the Australian dollar, New Zealand dollar, and Japanese yen pairs, as these markets are most active during this time.
What makes the Asian Kill Zone special is its volatility, driven by economic news releases that occur during this session. Traders who keep an eye on these news releases and their impact on the market can make the most of this period.
Main Characteristics of Asian Kill Zone
-During the Asian Kill Zone, traders can often find optimal trade entry patterns, offering potential gains of 15 to 20 pips for scalp trades.
-NZD, and JPY pairs are ideal for this time of the day.
-The Asian Open can sometimes set up an Optimal Trade Entry Pattern that can offer a 15 – 20 pip scalp.
-The Higher frame bias is helpful here – but short-term retracements in either Bull or Bear
-Markets can offer similar OTE Setups.
Asian Kill Zone Time
ICT Asian Kill Zone Times lies in between 8:00 PM Eastern to10:00 PM Eastern
ICT London Kill Zone Time
The ICT London Kill Zone takes center stage during the London trading session, witnessing the highest volume of order execution compared to other sessions. It is an opportune time for those trading the EUR and GBP pairs. Notably, the London Open often presents opportunities for traders to enter positions with the potential for gains ranging from 25 to 50 pips.
Main Characteristics of London Kill Zone
One of the distinctive characteristics of the London Kill Zone is its tendency to create the low of the day in bullish markets and the high of the day in bearish markets.
Time of ICT London Kill Zone
London Kill Zone of ICT lies between 2:00 AM to 5:00 AM Eastern Time
Traders should monitor the key times between 2:00 AM to 5:00 AM New York time to capitalize on the price action during the London session.
The New York Kill Zone Time: The Land of Opportunities
For traders dealing with major pairs coupled with the dollar index, the New York Kill Zone is an essential timeframe to watch.
Similar to other Kill Zones, this period often sets up optimal trade entry patterns, providing potential gains of 20 to 30 pips for scalp trades.
Time of New York Kill Zone
The New York Kill Zone occurs between 8:00 AM to 11:00 AM Eastern Time. This time is favorable for major pairs and benefits from the overlap with the London session, making it a golden opportunity for traders.
New York Kill Zone lies between 8:00 AM to 1:00 AM Eastern Time
The London Close Kill Zone: The Final Countdown
The London Close Kill Zone is a specific time frame that can create continuation points for swings that extend well into New York afternoon hours. It’s the last chance for traders to make their moves before the market closes for the day, making accurate predictions during this period potentially profitable.
Between approximately 8:00 AM to 9:00 AM Eastern Time (adjusted for daylight savings) , traders can find optimal trade entry patterns, offering opportunities for 10 to 20 pips of profit on scalp trades. Monitoring the key times from 10:00 AM to Noon NY time can yield valuable insights during the London Close Kill Zone.
ICT Kill Zone on During Daylight Saving Time (DST)
Now, let’s talk about Daylight Saving Time (DST), which starts on the second Sunday in March and ends on the first Sunday in November. During this period, Eastern Time is shifted one hour ahead to Eastern Daylight Time (EDT), which is UTC-4.
For example, let’s consider April 10th, and the time is 11:30 AM in Eastern Time (ET) during Daylight Saving Time. To convert this to Coordinated Universal Time (UTC), you add 4 hours to the local time:
11:30 AM ET (UTC-4) + 4 hours = 3:30 PM UTC
During Daylight Saving Time, the clocks are adjusted forward by one hour, giving us an extra hour of daylight in the evenings. When Daylight Saving Time ends, we set the clocks back by one hour to return to Eastern Standard Time.
ICT Kill Zone Setting on Trading View
On the TradingView chart, you’ll find the time zone option at the bottom right corner. To set the correct time zone, click on it, and choose “UTC-5” during regular days (Standard Time) and “UTC-4” during daylight saving time, which typically occurs from the second Sunday in March to the first Sunday in November.
ICT Kill Zones Indicator Trading view & MT4
A number of indicator are available on the trading view that automatically highlights the ICT kill zones on your chart.
ICT Kill Zone LuxAlgo is one of the best indicators available on trading view.
To Add ICT Kill Zone indicator you adopt the following steps:
Step1:Click on the indicator icon on top of the trading view
Step2 write LuxAlgo ICT Kill Zone
Understanding and effectively utilizing ICT Kill Zones can significantly enhance a trader’s success in the forex market. Each Kill Zone represents a unique opportunity with its own set of potential gains.
ORDER BLOCK trading strategyThe order block trading strategy is based on the concept of smart money, focusing on identifying specific zones where institutional traders previously executed their orders. Once we have successfully identified these zones, we patiently wait for the price to revisit these levels.
By using a suitable strategy, we then enter our trades in the anticipated direction.
-What is an Order Block in Forex:
Order blocks are special zones within the market where significant buy or sell orders from major market participants, like institutional traders, have been previously executed.
These order clusters, situated in specific price regions, hold considerable influence over price action, market sentiment, and liquidity.
Order blocks serve as a specialized methodology to determine crucial support and resistance levels, derived from the trading behavior of institutional traders. These levels are subsequently employed as strategic points for initiating or concluding trades.
-Understanding Order Block in Trading:
In Forex or any other market, ict order block represent crucial price levels where we observe significant and aggressive price movements. These levels are characterized by large firms strategically placing their orders, which often results in the market moving forcefully from those points.
To influence the market in a specific direction, smart money or hedge funds execute orders worth billions of dollars at particular price levels. However, not all of their orders are immediately filled. As a result, smart money revisits these levels to execute the pending orders, leading to further movement in the desired direction.
-ICT Order Blocks Definition:
Order blocks can indeed be identified on any time frame, ranging from small time frame like 15m,30 m and m5 to larger time frames like daily or weekly charts.
Order blocks can be classified into two main types: Bullish Order Blocks and Bearish Order Blocks.
1. Bullish Order Block:
A Bullish Order Block is recognized as the last downward candle before the price experiences a significant and aggressive upward movement. It represents a key level where institutional traders placed substantial buy orders, causing the market to rally strongly from that point.
2. Bearish Order Block:
On the other hand, a Bearish Order Block is characterized by the last upward closing candle before the price undergoes a sharp and forceful downward movement. It signifies a critical level where large market participants, such as institutional traders, positioned significant sell orders, resulting in a significant decline in the market.
By identifying and analyzing these Bullish and Bearish Blocks, traders can gain insights into a potential reversal or continuation patterns and utilize them as entry or exit points for their trades.
Trading order blocks go beyond solely identifying the last up or down closing candle. To effectively trade order blocks, it is essential to consider several contextual factors, including:
1. Liquidity Hunt: Market participants, especially institutional traders, may strategically place their orders to trigger stop losses or create a liquidity imbalance. Understanding liquidity patterns and how they can influence price action is crucial.
2. Daily Bias: Evaluating the overall market sentiment and bias for the day is important. This involves considering factors such as news events, economic releases, and geopolitical developments that may impact the market and influence order-block behavior.
3. Interest Rates and Fundamentals: Fundamental factors, including interest rates, economic indicators, and central bank policies, can significantly influence market conditions. Understanding how these factors interact with order blocks can provide valuable insights for trading decisions.
By taking these contextual factors into account, traders can enhance their understanding of order blocks and make more informed trading decisions.
To identify order blocks, price action traders typically examine historical price movements on the chart to locate areas where the market has shown strong reactions.
-How to identifying order blocks:
1. Look for strong price reactions: Analyze the chart to identify areas where the price has displayed significant and notable reactions, such as sharp reversals, extended consolidations, or breakouts.
2. Mark potential order block levels: Once you identify these areas of strong price reactions, mark them as potential order block levels on your chart. These levels represent key price zones where institutional traders may have executed large orders.
3. Assess support and resistance characteristics: Consider how the price behaves with the marked order block levels. If the price bounces off a specific level multiple times, it indicates a robust level of support or resistance, depending on whether the price approached the level from above or below.
4. Watch for role reversal: When an order block level is breached, its role as support or resistance can reverse. For instance, a broken resistance level may transform into a support level, and vice versa. In such cases, traders often wait for a retest of the broken level before entering trades in the direction of the breakout.
By following these steps and considering the principles of support and resistance, traders can effectively identify and utilize order blocks in their trading strategies. However, it’s important to note that order block analysis is just one tool among many in a comprehensive trading approach.
-How To Trade Order Blocks:
The steps you’ve mentioned provide a general guideline for trading order blocks in forex. Here’s a breakdown of each step:
1. Point of Interest (POI): Start by identifying potential order blocks on higher time frames, such as daily and 4-hour charts. These could be areas of consolidation or strong price reactions. Once you’ve marked these POIs, move to the next step.
2. Optimization: Switch to lower time frames like 1-hour, 15-minute, or 5-minute charts to refine and optimize your POIs. By zooming in on these lower time frames, you can better analyze the price action within the identified areas.
3. Price Observation: Keep an eye on the price action in the higher time frame. Monitor how the price behaves as it approaches your POI. This observation helps you determine the strength of the order block and potential trading opportunities.
4. Rejection Analysis: When the price reaches your POI, switch to the lower time frame to examine how the order block reacts to the price. Look for signs of rejection, like fair value gap
5. Entry on Lower Time Frame: Once you’ve observed a rejection or a significant reaction at the order block on the lower time frame, you can plan your entry. Look for suitable entry signals, such as a breakout, pullback, FVG price Imbalance, and more
6. Stop Loss Placement: To manage risk, it’s important to place a stop loss order. Consider setting your stop loss 1 to 5 pips below the order block ict to allow for potential market noise and fluctuations. This helps protect your trading capital in case the trade doesn’t go as planned.
Remember, these steps provide a general framework for trading ict order blocks, but it’s crucial to develop a trading strategy that suits your risk tolerance, trading style, and market conditions.
It’s recommended to thoroughly back test and practice your strategy before applying it with real money. Additionally, staying updated with market news and having proper risk management practices are essential for successful trading.
SMC The best way to detect Order Blocks Due to the great popularity of the Smart Money Concept approach, traders around the world are learning how to identify Order Block in the best way possible. Although there are different variations of the approach, the logic remains the same - accurately identifying a large limit volume in order to get the best entry point and catch the movement of a major player.
I will show you, in my opinion, the most accurate practice for detecting Order Block, which in addition will increase the number of potential entries. It is different from the classic application. Check it out!
Defining Max and Min on the chart
No matter what asset you are trading and timeframe, any logic for finding OB starts with marking the lows and highs (MIN MAX).
This is necessary to:
Identifying the trend in whose direction we will be looking for the Order Block.
Directly for the Order Block itself, as it will be located at one of the MIN or MAX.
In our example, we will be looking for an Order Block on USDJPY H1
Note:
There are so-called true Min and Max (signed in white on the chart). They determine the direction of the trend on this timeframe and the Order Block can be located in them.
But there are also local Min and Max (signed in orange color), which do NOT determine the direction of the trend on this timeframe, but they can also contain an Order Block.
Having determined the true Min and Max, it is not difficult to establish the trend direction by comparing the last 4 points of the true MIN MAX.
In our case, the trend is downward.
Looking for a Order Block by trend
OB should be searched at the last MAX (in case of selling) or MIN (in case of buying). It does not matter whether it is a local or a true MIN MAX, the most important thing is the most recent one. And here are the specific rules for this (for a bearish OB):
Find the most recent MAX
Find the last green candle before the MAX
MAX point should be a false breakout of this green candle
Draw the boundaries of this green candle - they will be the order block
Let's turn to a close-up of our example:
All conditions are met. Found order block for sale.
Oder Block activation and entry.
Once an Order Block is marked, it is not yet sufficient to find an entry. An important condition before entry is Activation of the block. This is how we make sure that a major player is really moving the price in the right direction. Activation is the breakdown of the block in the direction of the trade.
In our example, activation is a break of the lower boundary of the block.
Attention: if the block order breaks through in the opposite direction, it is considered broken and can no longer be used.
After activation, you should wait for the price to return to the block and open a trade there. It is ideal to put a limit order. Stop Loss will always be the upper boundary of the block, Take Profit can be taken variably, there are no rigid rules.
Strong blocks can give more than one reaction. Then you can try to enter the block again.
Conclusion
In this article, we have shown the author's variant of how to find a block order on the trend and showed an example of how to work it out. Such blocks are especially strong and give many good entries. Of course, finding a block order is an important part of the Smart Money concept, but there are many more tools that will help to clarify the entry and exit and make SMC as efficient as possible (e.g. liquidity). We will talk about them in other articles.
How to trade Smart Money Concepts (SMC)This trading strategy was initially popularized by an infamous trader who is also the founder of the Inner Circle Trading (ICT) method which is claimed to be the evolved version of the SMC. Let’s first take a look at the building blocks of this trading strategy and compare it with the well-known trading concepts by industrial titans (Dow, Wyckoff, Elliott).
Essentially, SMC puts forth the notion that market makers, including institutions like banks and hedge funds, play a deliberate role in complicating trading endeavours for retail traders. Under the Smart Money Concepts framework, retail traders are advised to construct their strategies around the activities of the "smart money," denoting the capital controlled by these market makers.
The core concept involves replicating the trading behaviour of these influential entities, with a specific focus on variables such as supply, demand dynamics, and the structural aspects of the market. Therefore, as an SMC trader, you'll meticulously examine these elements when making trading decisions, aligning your approach with the sophisticated techniques of prominent market figures. By embracing this perspective and closely monitoring the actions of market makers, SMC traders endeavour to establish an advantageous position in their trading activities, aiming to capitalise on market movements driven by smart money.
When you initially dive into the Smart Money Concepts (SMC), the technical vocabulary can be a bit overwhelming. To help demystify it, here's an overview of some common terms used by SMC traders.
1. Order Blocks
These are used to discuss supply and demand. Some SMC traders consider order blocks as a more refined concept than standard supply and demand, although not everyone agrees on this.
An order block signifies a concentrated area of limit orders awaiting execution, identified on a chart by analysing past price movements for significant shifts. These zones serve as pivotal points in price action trading, influencing the market's future direction. When a multitude of buy or sell orders cluster at a specific price level, it establishes a robust support or resistance, capable of absorbing pressure and triggering price reversals or consolidation.
2.Fair Value Gap
You should clarify whether your current trading style suits you. If you don't have time to look at charts during the day, you should not focus your strategy on intraday trading using 1
5-minute or 30-minute charts. It is definitely better to develop an approach that works on a 4-hour or daily chart so that you have enough time to analyze the charts before or after work.
Ideal time and timeframe
This phrase describes an imbalance in the market. It occurs when the price departs from a specific level with limited trading activity, resulting in one-directional price movement.
In the case of a bearish trend, the Fair Value Gap represents the price range between the low of the previous candle and the high of the following candle. This area reveals a discrepancy in the market, which may indicate a potential trading opportunity. The same principle applies to a bullish trend but with the opposite conditions.
3.Liquidity
Liquidity plays a pivotal role in SMC. It pertains to price levels where orders accumulate, rendering an asset class "liquid." Essentially, these are price points with available orders ready for transactions. Liquidity can manifest in various forms, such as highs and lows or trend line liquidity.
How liquidity is handled varies depending on the trader. One of the most common approaches is to use a pivot high or pivot low. For better understanding, a pivot high or low is formed when several adjacent candlesticks have a higher low or lower high.
In the picture, we can see the pivot low. The candlestick has the lowest low compared to its three neighbours to the right and left.
4.Break of Structure (BOS)
Once you become familiar with this terminology, you'll realize that many SMC concepts are consistent with traditional trading ideas. A fundamental element of SMC market analysis is the emphasis on the "break of structure" (BOS) in the market.
5.Change of Character (ChoCH)
For instance, in a chart illustrating breaks of structure, each time the price surpasses the previous high, a break of structure occurs. Conversely, when the price drops below previously established lows, it signals a change of character (ChoCH). SMC traders leverage their understanding of these patterns to make informed decisions based on the market's behaviour.
Happy New Year 2024| Learn Our Methods | Read Description|Happy New Year Everyone 2024:
Let's first talk about CHFJPY then we will talk about how you can improve and learn some tips.
CHFJPY in last six or seven months price overbought heavily due to JPY poor performance and government's zero intention to interfere in the market. However, many reports suggests that JPY will likely to be rebound in first quarter of 2024 in this case we can see a strong shift in price characteristics. Our first entry indicates, that we should expect price to continue the bearish momentum and drop from current area of the price. However, as we will having NFP in the first week of the month, it is likely to see some unexpected movement in the market. Second entry, is when price fill the gaps in the market and then drop smoothly, we will keep you updated.
We want all of you to succeed in the forex or commodities trading.
Here how you can improve:
Firstly find one or two pairs that suits you: meaning if you focus on every single instruments available to trade in the market, you will never succeed instead focus on one or two pairs and master them, know how and when these pairs move, what factors influence them in the market and trade swing highs and lows.
Secondly, use longer time frames to have a better vision, have a longer vision which will help you catch the big moves, yes, it is time consuming but if you are beginner then focus first in this and then along the way you will learn intraday trading.
Lastly, learn more about consolidation, accumulation and distribution: before the big reversal, price first will consolidate then accumulate and distribute, you should be looking to enter in phase of accumulation and take every enter when price consolidate which leads to a breakout.
If you learn above information in details and practice, your chances of becoming a successful trade increase. There is no overnight success, it is all hard work, if you believe in your self and focus on above things you will one day be proud of yourself.
Happy New Year and Trade Safe 2024.
We wish all of you all the best.
Team Setupsfx_
Market Manipulations. Bullish Trap (smart money concepts)
In the today's article, we will discuss how smart money manipulate the market with a bullish trap.
In simple words, a bullish trap is a FALSE bullish signal created by big players.
With a bullish trap, the smart money aims to:
1️⃣ Increase demand on an asset, encouraging the market participant to buy it.
2️⃣ Make sellers close their positions in a loss.
When a short position is closed, it is automatically BOUGHT by the market.
Take a look at a key horizontal resistance on AUDCHF.
Many times in the past, the market dropped from that.
For sellers, it is a perfect area to short from.
Bullish violation of the underlined zone make sellers close their position in a loss and attracts buyers.
Then the market suddenly starts falling heavily, revealing the presence of smart money.
Both the sellers and the buyers lose their money because of the manipulation.
There are 2 main reasons why the smart money manipulates the markets in a such a way:
1️⃣ - A big player is seeking to close a huge long position
When a long position is closed, it is automatically SOLD to the market.
In order to sell a huge position, smart money needs a counterpart who will buy their position.
Triggering stop losses of sellers and creating a false demand, smart money sell their position partially to the crowd.
2️⃣ - A big player wants to open a huge short position
But why the smart money can't just close their long position or open short without a manipulation?
A big sell order placed by the institutional trader, closing their long position, can have an impact on the price of the asset. If the sell order is large enough, it can push the price downward as sellers outnumber buyers. Smart money are trying to balance the supply and demand on the market, hiding their presence.
It is quite complicated for the newbies and even for experienced traders to recognize a bullish trap.
One of the efficient ways is to apply multiple time frame analysis and price action.
Remember, that most of the time bullish traps occur on key horizontal or vertical resistances.
After you see a breakout, analyze lower time frames.
Quite often, after a breakout, the market starts ranging.
After a breakout of a key daily resistance, gold started to consolidate within a narrow range on an hourly time frame.
Bearish breakout of the support of the range will indicate a strength of the sellers and a highly probable bullish trap.
Remember, that you can not spot all the traps, and occasionally you will be fooled by smart money. However, with experience, you will learn to recognize common bullish traps.
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SMC Trading Basics. Change of Character - CHoCH
In the today's post, we will discuss one of the most crucial concepts in SMC - Change of Character.
Change of Character relates to market trend analysis.
In order to understand its meaning properly, first, we will discuss how Smart Money traders execute trend analysis.
🔘 Smart Money Traders apply price action for the identification of the direction of the market.
They believe that the trend is bullish ,
if the price forms at least 2 bullish impulse with 2 consequent higher highs and a higher low between them.
The market trend is considered to be bearish ,
if the market forms at least 2 bearish impulses with 2 consequent lower lows and a lower high between them.
Here is how the trend analysis looks in practice.
One perceives the price action as the set of impulse and retracement legs.
According to the rules described above, USDCAD is trading in a bullish trend because the pair set 2 higher lows and 2 higher highs.
🔘Of course, trends do not last forever.
A skill of the identification of the market reversal is a key to substantial profits in trading.
Change of Character will help you quite accurately identify a bullish and bearish trend violation.
📉In a bearish trend , the main focus is the level of the last lower high.
While the market is trading below or on that, the trend remains bearish .
However, its bullish violation is a very important bullish signal,
it is called a Change of Character, and it signifies a c onfirmed violation of a bearish trend.
In a bearish trend , CHoCH is a very powerful bullish pattern.
Take a look, how accurate CHoCH indicated the trend reversal on Gold.
After a massive selloff, a bullish breakout of the level of the last lower high confirmed the initiation of a strong bullish wave.
📈In a bullish trend , the main point of interest is the level of the last higher low . While the price is trading above that or on that, the trend remains bullish .
A bearish violation of the last higher low level signifies the violation of a current bullish trend. It is called a Change of Character, and it is a very accurate bearish pattern.
Take a look at the example on Dollar Index below.
In a bullish trend, bearish violation of the last higher low level
quite accurately predicted a coming bearish reversal.
Change of Character is one of the simplest, yet accurate SMC patterns that you should know.
First, learn to properly execute the price action analysis and identify HH, HL, LL, LH and then CHoCH will be your main tool for the identification of the trend reversal.
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Blueprint to Success: How to Master Trading Sessions & Planning👑 Pre-Trading Sessions & Planning:
🔥 Key Details + Concepts
--------------------------------------
(Psychological, Technical & Concepts):
🟠 Psychological:
- Don’t trade if your emotions aren’t aligning with what is on the screen.
- If you’re not super happy about entering, and you don’t fully accept the loss, don’t take the trade.
- Don’t ‘force’ something to work because it won’t.
- Trade as if you are looking for buys and sells in your markup. This removes mental bias, and effectively emotion in trading.
🟠 Technical:
- Cause is the most important factor in trading – find what caused the injection of volume (‘follow the money’). Did it get effectively mitigated? Did it leave imbalance? … Find that block of orders and don’t get liquidated
- The more inducement respected, the more liquidity to take out, the bigger the move
- Zones to trade from must have resting orders to mitigate. Make sure they have inducement above/below (or create it), and they are the cause of structural breaks, demand/supply fails etc
- Start analysing on the daily first! Find the intention of price and follow it
- Mark out S/R – (support becomes resistance levels vice versa) as that level will be liquidated to usually meet our orderblock above/below it
- Previous daily/weekly highs/lows can act as strong structural inducement points
- Price needs reason to move to certain levels – imbalance
- Often when we have a low Phase 2 inducement, we will sweep it’s orderblock as a SMT because of the zone’s large imbalance = lack of inducement
- If you don’t spot the buyers/sellers who got swept before entering, you’ll become liquidated
- Mark out pullback zones too
- If we break our LPOD/S, we are effectively going to run through all mitigated price until the next valid orderblock
- Ensure you wait for your respective time-frame reaction (e.g., don’t look for a 1m reversal from a 4h zone)
- If price taps the outside of a zone but doesn’t enter it, it can still be used as inducement
- We don’t recommend stacking countertrend trades
- A mitigation can be confirmed when price sweeps into its previous range over another small-range inducement.
🟠 Concepts
- The demand/supply that took out the Phase 1 inducement then gets broken confirms a shift in market structure. If it is respected, we can trade a continuation.
- A ‘slight mitigation’ is when price sweeps liquidity into a range, but doesn’t properly mitigate the orderblock where the high-volume orders lie. Even though we may react from there, we can come back to this orderblock and properly mitigate it, using the ‘slight mitigation’ level as a point of inducement.
- It is important for the AR (automatic rally) to ‘fail’ in a reversal range after the B/SC (Buyers/sellers climax) as it often grabs the LPOD/S (the last point of demand & supply), so it is successfully mitigated
- News candles can be targeted high/lows as they don’t have inducement
- Price works with momentum. You will never see something shoot up or down randomly
- Refine zones by excluding the inducement it swept before it
– draw a line through the orderblock from the inducement it swept. This will refine your orderblock to the pure manipulation *has exceptions*
- If an inducement phase isn’t very clean or only sweeps a small range, there will be another opportunity as more manipulation is needed to fuel a larger move
- Weak highs and lows are determined after a leg has been properly mitigated; the 5-15m TF is best to determine an active zone
- A high/low is likely to be targeted when it wicks the other side’s high/low (to sweep) instead of having a candle closing over (BoS)
- The first part of a ChoCh is often formed from Phase 1 inducement getting swept, creating a slight pullback, then breaking it again to hit the refinement
Used Word Definitions:
- LPOD/S – Last point of demand/supply
- ChoCh – Change of character (a sweep of liquidity then a break of structure)
- BoS – Break of structure (a failure of supply or demand creating a price leg break)
- OB – Orderblock (a valid zone to trade from)
- FVG – Fair value gap (a form of inefficiency/price gaps in the market)
- IMB – Imbalance (a form of inefficiency/price gaps in the market)
- IPA – Inefficient price action (imbalance)
- S&D – Supply and demand (the levels of buying and selling)
- IFC – Institutionally funded candle (a candle created by institutions to push price to a certain area)
- IPB – Inducement Pullback (The level where price pullbacks before a continuation)
- PA – Price action (how price is moving)
- B2S – Buy to sell (often seen as a wick to mitigate or sweep)
- S2B – Sell to buy (often seen as a wick to mitigate or sweep)
- AOI – Area of interest (an area of price that is reactive or tradable)
- POI – Point of interest (a specific point where price is reactive or tradable)
- IND – Inducement (placement of liquidity that is used to manipulate traders)
- EQH/L’s – Equal highs/lows
- SMT – Smart money trap (a zone that doesn’t have liquidity under/above it, and gets run, trapping SMC traders)
- MSS - Market Structure Shift (a confirmed shift in the markets direction towards the next reversal zone)
- Vectors – Large-bodied, impulsive candles that are to push price to its purposeful target
- V-SR – V-Shaped Recovery (quick movement of price to enter and exit a zone)
- TF – Time frame
- FR – Failed Reaction (Internal supply/demand failure)
- OF – Order-flow (the movement of money through the market)
- True Zone – The actual orderblock that will be used which holds the high volume or orders
- PDH/PWH or PDL/PWL – Previous daily/weekly high/low
🟠 Colour Codes:
🟠 Time and Price (Times in AEST):
ASIA > FRANKFURT > LONDON > NEW YORK
- Asia: – Asia is important to analyse as it can create the model for New York and London its purpose is to create liquidity above and below its session. Mark the bottom and top to create a range, as well as the midline. Often, price will aim to take a high/low or both (AWS) starting with Frankfurt + London Open. If Asia takes a form of liquidity and is impulsive, a continuation trade can be played.
- Frankfurt: - Frankfurt often prepares London for its main movement of the day. It often does this by taking out the high or low of Asia to create an orderblock mitigation for London, creates more Phase 1 inducement for London to take out, or helps to move price to an already-made valid orderblock.
- London: - When London opens, there is a volatility spike in price. London’s purpose is to attack the liquidity created during Asia. Often, London creates a continuation mitigation after 1.5 hours, but can also contribute to a larger liquidity build-up for New York. Entries that induce + mitigate can be taken at the open (sometimes +30). After 2 hours of opening, we often see a shift in direction.
- Pre-NY: - Before New York opens, we often see an impulsive move that directly contributes to the New York session. Sometimes, we can create a valid zone for New York to play from by mitigating high-volume orders. Most often, we see an impulse in price to move into a higher timeframe orderblock to then become targeted liquidity, or we create more low timeframe reversal inducement to then be swept.
- New York: –We open with a volatile shift of momentum. New York’s purpose is to attack the liquidity created during the London session, or to create a continuation from London. The New York trap usually starts 1 hour after opening and reverses. After 1.5 hours of opening (MMM), we often see a clean mitigation of the ‘correct’ orderblock and liquidate the opening move. Sometimes, New York Open can mitigate the high-volume orders and continue in the correct direction of the day.
- London Close – mitigates the peak of NY open / Reversal for a continuation in NY open direction. Sometimes there is a mitigation-inducement before London Close.
- Magic Minute Mitigations (MMM) - refer to high probability trading times that mitigate active continuation orderblocks. We can best see these 1.5 hours after London and New York Opens – rarely, we can see these 3.5 hours after these opens instead.
In the next post I will continue with my 8-step daily markup process and my Asian session manipulation formulas.
If you found this article helpful, please share it with your friends and leave a comment!
Cheers!
Mastering Liquidity in Trading: Unraveling the Power of SMC 🔥Liquidity is what moves the market. Liquidity and liquidity pools are created and targeted by the markets and a lack of understanding on this topic is the main reason why the trading mind fails even if the analyst mind is correct. Traders who have been victim to their stop losses being taken by a wick before price running in their favour are the perfect example of having the correct analytical mind but a weak trading one.
Liquidity is unlike an order block or price inefficiency or anything else that can be physically identified on a chart. It is invisible, however, it is still possible to identify without the need of indicators or anything other than price action alone.
Simply put, liquidity is money in the market. Typically, this money comes in the form of retail orders and stop losses. Knowing this allows us to understand that if the market targets liquidity, and liquidity comes in the form of retail stop losses, the market must be hunting and going against retail strategies.
🟢The first and most prominent of these retail strategies is the idea of support and resistance. On the chart we can see an example of what retail traders would refer to as a level of resistance. In doing this they would short price from this level expecting a move down. This creates a liquidity pool just above this ‘resistance level’ where the average retail trader would place their stop losses. This liquidity pool is now a target for the market. So instead of trading this move down, we wait for the liquidity grab and use the rest of this strategy to capitalise on the bearish move that we can expect.
On the Chart is a demonstration of the market hunting liquidity before making its next move. Again this is where traders would be correct in terms of bias but incorrect in terms of trading.
This is an example of what an informed chart looks like. Instead of highlighting support and resistance levels, we highlight equal lows and equal highs respectively. Equals are usually in the form of otherwise referred to double tops or double bottoms but can also be more than that. The key difference, however, is that we would anticipate the market hunting the liquidity above the equal highs and below the equal lows. Due to this, we avoid being a victim to the market stopping us out by a wick and falling in our direction.
The second most prominent retail strategy or idea is the trend-line. Every time a trend-line formation is present within the market, we can now understand the amount of stop losses and, therefore, liquidity that would be sitting under this ‘trend-line’.
Above is an example of the importance of recognising trend-line liquidity. Once the liquidity above the equal highs has been hunted, we need to establish the next liquidity pool in the market. Seeing a break above the ‘resistance level’ would be seen as a ‘bullish breakout’ by the average trader. However, we can identify that as a liquidity purge and higher high, in which case we can expect a higher low to be made - which would mean a bearish retracement.
On top of this, we can see a build up of trend-line liquidity just above the discount end of the parent price range. This gives us an added confluence and confidence in the fact that we can expect lower prices with the liquidity underneath the trend-line as our first target.
Above is an example of liquidity being grabbed on the bullish side (above the equal highs) sending the uninformed trader long based off of a ‘bullish breakout’, then hunting the liquidity on the bearish side (below the trend-line) and sending the uninformed trader short based off of the break of the trend-line. This is typical of the market - it shakes out impatient and uninformed traders on both sides of the market before making the actual move.
Here is another examples of how trendline liquidity gets purged by the market. On the chart we can see a trend-line where many traders would be longing the market, unaware that they will be victims of a liquidity purge.
Below we can see that liquidity purge below the trend-line which would send the average trader short. Using the rest of the strategy, we are able to understand that price will react from specific levels to go long
Below we can see the completion of this market cycle with our levels being respected and the real bullish leg being made.
🔥🟠🔥🔥🟠🔥 BONUS CHEATSHEETS👇👇👇👇
Unlocking the Secrets of Price Inefficiency: Dive Deep into FVG👑Price inefficiencies are also known as imbalances, gaps or voids. Healthy price action moves in a zigzag fashion, making highs and lows in line with the directional bias at any given moment. When price isn’t trending we find it consolidates, in which case highs lows are still being made. However, we may also see price move in straight lines with huge volume and momentum. When this happens, price finds itself unable to deliver price in an efficient manner. For example, in a bullish environment, price may continue to make higher highs without providing higher lows at a discount price. When price moves with this much momentum, it leaves behind imbalances.
🟠An imbalance can be identified by open space in price action, where the wicks on either side of a candle do not match each other. On the left is an example of price inefficiency, since the wick high of candle 1 does not meet the wick low of candle 3, leading to an imbalance on candle 2.
🟠This is an example of healthy price action with no imbalances. This is because all candles have wicks on either side of them. Since wicks were bodies during live price action and are bodies on lower time frames, this shows that price was delivered efficiently to buyers and sellers in this area. Whereas the example above shows an imbalance on a bullish candle, which shows that price was only available to buyers in that imbalance and therefore is not efficient.
👉For price to be efficient, it needs to be delivered to buyers and sellers. This helps us understand that in our original bullish imbalance, price has to come back and fill that imbalance using bearish price action in order to make that price available to sellers. This re-balancing could take hours, days, weeks or years, but it is our job to understand that it must happen at some point. Inline with the rest of the strategy, we can use this knowledge to pick out the specific imbalances that will be filled and how we can capitalise on this.
🟠This is an example of the correctly identified imbalance and where we expect price to react from
🟠This is an example when is our level being met, it is at this point that we use the rest of the strategy and knowledge to capitalise on the move that is about to unfold with high risk:reward entries.
🟠This is the completion of this particular market cycle, with our level being respected and price giving us a nice bullish leg.
🔴Bearish Order Flow:
🟢Bullish Order Flow:
A Comprehensive Guide to Order BlocksOrder Blocks Explained
Now we'll look at one of the important concepts we utilize to find our precise entry points:
order blocks.
So, what exactly is an order block? An orderblock is a visible spot on the chart where a
large order is being placed on the market. You'll notice the order being placed, followed
by a quick move from that region, leaving behind imbalances and a structures would be
broken
The candle before that impulsive move is what we call an "order block," but I want you to
remember that order blocks are essentially areas of supply and demand in the markets,
and we'll go over that later in an other idea.
Essentially, an order block is the fingerprint that market makers and
institutions leave behind on the charts that informs us of their activity and intent
which we can capitalise on. Unlike retail traders, the capital available to market
makers and institutions is enough to move the market and affect price. For this
reason, there are differences in the ways that market makers and retail traders go
about trading in the financial markets.
The first difference to understand is that market makers and institutions
cannot simply place a buy or a sell trade. Due to the high amounts of volume
behind each trade they place (millions of lots), a single buy or sell from institutions
would crash the market. For this reason, they have to hedge each position. In other
words, each time they place a buy, they have to place a sell at the same price, and
vice versa. For example, if a buy is placed at 1.34610, and price moves up 100
pips, the buy trade will be 100 pips in profit, whereas the sell trade from the same
price will be 230 pips in loss. Essentially there is an equal floating profit and loss.
The second difference between retail traders and market makers is that
market makers and institutions do not trade with a stop loss, therefore, the floating
loss in the sell trade from the example above won’t close itself. Therefore, once the
market is at a desirable high, market makers will close the buy positions in profit,
let the price trickle back to their entry point, and close the sell trade at breakeven.
Bullish Orderblock (Demand)
Looking at this textbook example, we can see that the red block was the last bearish candle before the impulsive move, the candle would normally consist mostly body with very minimal wicks, This is what we call our bullish order block. To mark out our OB we draw a zone from the top of the candle to the bottom, but you may also include the wicks.
Bearish Orderblock (Supply)
Looking at this textbook example, we can see that the red block was the last bearish candle before the impulsive move, the candle would normally consist mostly body with very minimal wicks, This is what we call our bullish order block. To mark out our OB we draw a zone from the top of the candle to the bottom, but you may also include the wicks. Looking at this textbook example, we can see that the grey block was the last Bullish candle before the impulsive move, the candle would normally consist mostly body with very minimal wicks, This is what we call our Bearish order block. To mark out our OB we draw a zone from the top of the candle to the bottom, but you may also include the wicks.
HOW TO TRADE USING ORDERBLOCKS
First stage is identifying your higher time frame directional bias. Whether you are looking for intraday or Swing entries you still need to understand which way the market is moving for the pair that you are focusing on. Essentially you want to identify Order blocks from weekly down to the hourly and work off there. However, the more experience you gain, you may find that you can trade intraday moves by having a short term directional bias from lower time frames and finding entries on an even lower time frames. Either way, the concept is exactly the same.
From above we can see a clear break of structure, this is the first thing we look for before looking for OBs. Reason for this, we want to find the candle that created this move, this candle is our OB. The OB is generally the last opposing candle before the move. So if its a bearish break, the OB is a Bullish candle. However, we need to understand what kind of BOS we look for and how to refine our OBs.
HOW TO REFINE ORDER BLOCKS
There are a few ways to refine the OB. The easiest would be moving left from the OB until you find the candle before the impulse which is still within the OB candles range.
Example:
As we can see above, the green candle following the OB hasn't overly moved or broken the range of the OB. This is now our refined OB. You can do this on all time frames. Alternatively, you can locate your OB, and you can refine down the time frames and find a clear open OB within the OB.
So here on the picture, that little candle with big wicks is our OB, however within that candle on a lower time frame, there is a clear OB and this is now our refined OB. You can go down by as many time frames as you like.
TIP: If you are happy with the RR from a particular time frame OB, then Simply use that one. Don't get greedy and don't use lower time frames if it makes you anxious.
UNDERSTANDING BREAK OF STRUCTURE (BOS)
There are two types of BOS, we prefer a full body break.
This is very simple to understand as shown below:
HOW TO TRADE USING ORDERBLOCKS
Safer entry
Identify your Point of interest on the higher time frame. In this example it was the hourly, however as mentioned, this concept can be applied to any time frame. The higher time frames such as 4 hourly or daily are more more swing entries with hourly and lower being intraday.
So here we can see our higher POI. Now from here, you can look deeper into that OB so you have an idea as to where price could potentially go before reversing. Once you find your OB, you can set an alert at the Open of your OB. This frees up your time, meaning you dont need to sit and stare at the screen. The reason we trade is to for our free time, so why waste time staring and waiting.
Once price taps your higher time frame OB, go to a lower time frame. This is up to you and what you are comfortable with, some prefer 1 min some prefer 15 min its up to you. But what we look for is a BOS and an OB on the lower time frame. Once we find our OB we set a limit order at either THE OPEN of the OB or 50% of the OB. This again is up to you.
Once we set the order and set our target to our higher time frame High in this example.
The benefit of using a safer entry over a risk entry:
- More confirmation for the trade
- May get a better RR for the trade
Cons:
- More time consuming
- Sometimes it may not form a BOS on the lower time frame and price may just shoot from the higher time frame OB. So you may miss trades.
Risky entry
This method is very simple. Once you locate your Higher time frame OB, you simply go down the time frames till you find an OB within the higher time frame OB which is clear. Once you find your OB, mark it out. Use an OB which gives you and RR you are comfortable with. Same as before you can set a limit order at the OPEN or the 50% mark of the OB with your stop loss below the low of the OB or the overall low and target the recent high or low depending on if you are buying or selling.
With this style of entry, it is of course riskier. This method is ideal when there is high momentum in the direction you are aiming for. If its more within a consolidation period, it is not worth trying a risk entry.
Either way you go about, you get similar results and its all dependent on your risk appetite and how you are comfortable trading. Trading is personal to you, you dont need to follow what everyone else is doing. You need to what you are comfortable with doing and how you are happy about going about it.
PSYCHOLOGY
This way of trading is all about precision and finding the market at the perfect time of reversal. However, don't get too greedy with the RR, there is nothing wrong with sacrificing a few PIPS and rr for a safer trade.
having a pip stop loss, is not the goal, having a safe trade and saving capital is the main goal. Our percentages are always gonna be crazy even with a 10 pip stop, so dont always look for a smaller stop if there isn't one available.
Focus on yourself and what you are comfortable with. Don't trade time frames that you are not happy trading. the goal is not to be replicas of Vertex traders. The goal is to be you and be yourself as a trader. Be selfish and think about yourself and your own growth.
FAQ
When do we delete orders? When TP is hit or if there is a new BOS leaving another OB
Best timeframes? Any that makes you comfortable . if lower time frames make you anxious, don't use it. You want to be calm and relaxed when trading, not on edge.
Best pairs? Main indexes or pairs.
How to work with liquidity grab?Hello everyone👋 Today we will discuss how to effectively work with areas of increased liquidity. Actually, it would be appropriate to make this post after we have examined how order flow is formed in the market in order to understand the technical aspect of working with liquidity. Therefore, first, we will provide some introductory information using a long position as an example.
When a trader buys an asset, they usually set a stop loss at a certain level or, if they don't use protective orders, their position will have a liquidation price depending on the chosen leverage. Based on this, when a specific price level is reached (stop loss or liquidation), their asset will be sold with a market order that will match the nearest limit order. Hence the conclusion: any exit from a losing position, as described above, is someone else's entry into a position with a limit order, often at a favorable price. This is how the positions of all major market participants are accumulated.
So, we simply need to estimate where the maximum number of active stop losses is located and make a trading decision based on that.
Most often, stop orders are located in the following zones:
1️⃣Obvious levels with equal highs/lows.
2️⃣Above/below any high/low in an obvious trend.
After identifying such zones using our indicator or independently, you can take trades in the direction of liquidity grab (counter-trend trades with high potential but also high risk) or wait for actual liquidity grab and confirmation to enter a trend trade.
In the next post, we will explore the technical aspect of liquidity grab for a deeper understanding of the topic.
We look forward to your questions. Happy trading!
The Art of Smart Money Trading: Bank and Institution StrategiesThe realm of finance is replete with a plethora of phrases and terminology, and among the most prevalent is the notion of "smart money." This term commonly alludes to seasoned traders who possess access to a wealth of information and knowledge beyond the reach of novice traders or individual investors. Within the domain of cryptocurrency, the concept of smart money often pertains to significant institutional investors, banks, hedge funds, and corporations that engage in market investments. This comprehensive article aims to delve into the origins of the smart money concept, elucidate its pertinence to trading practices, and expound on how banks employ smart money strategies to generate profits. Additionally, we shall closely examine the three fundamental phases that constitute a bank's trading strategy: accumulation, manipulation, and allocation.
The concept of smart money has its roots in the recognition that certain market participants possess a distinct advantage due to their extensive experience, robust networks, and access to specialized information. These seasoned individuals or entities are deemed to possess a higher degree of expertise, enabling them to make astute investment decisions and exploit market inefficiencies more effectively than the average trader. In the realm of cryptocurrencies, the presence of smart money often exerts a significant influence on price movements and market trends.
Large institutional investors, such as banks, hedge funds, and corporations, are typically considered as the primary bearers of smart money within the cryptocurrency landscape. These entities have the financial resources, expertise, and infrastructure to conduct extensive research, employ sophisticated trading strategies, and execute substantial transactions in the market. Their actions and decisions often carry substantial weight and can sway market sentiment, prompting other market participants to follow suit.
Banks, in particular, leverage smart money strategies to capitalize on market opportunities and generate profits. Their trading strategies encompass three distinct phases: accumulation, manipulation, and allocation. During the accumulation phase, banks discreetly amass positions in a particular cryptocurrency, taking advantage of lower prices and limited market awareness. This phase allows them to build substantial positions without significantly impacting the market.
Following accumulation, banks proceed to the manipulation phase, wherein they employ various tactics to influence market sentiment and price movements. These tactics can include spreading rumors, initiating coordinated buying or selling actions, or employing technical analysis techniques to trigger specific market reactions. By skillfully manipulating market dynamics, banks aim to generate favorable price movements that benefit their accumulated positions.
Finally, during the allocation phase, banks strategically distribute or liquidate their holdings to maximize profits. This phase entails careful execution and timing to ensure optimal returns. Banks may employ a range of trading techniques, such as scaling out of positions gradually or employing algorithmic trading strategies, to efficiently allocate their holdings while minimizing market impact.
Understanding the dynamics of smart money and how banks utilize smart money strategies provides valuable insights for individual traders and investors. By monitoring the actions of these institutional players and comprehending the phases of their trading strategies, market participants can potentially identify trends, anticipate market movements, and align their own trading decisions accordingly.
What Is Smart Money?
The concept of smart money originated from the gambling industry, where less experienced players would bet on the winnings of more experienced players. In the trading world, the creator of the smart money strategy is trader Michael Huddleston, also known as the Inner Circle Trader (ICT). According to Huddleston's theory, the cryptocurrency market is predominantly controlled by big players who are seasoned trading professionals. These individuals determine the asset's price and the direction of the current trend as they operate with significant volumes of invested funds. Their behavior is considered "smart" due to their experience, awareness, and often access to important insider information, contrasting with the "dumb money" formed by inexperienced traders who lack crucial market insights.
For instance, a study conducted by BDC Consulting in August 2021 revealed that major market players and professional investors hold approximately 42.66% of all existing Bitcoin tokens. This means that almost half of the coins are managed and regulated by individual companies, renowned personalities, hedge funds, and other entities seeking to profit from cryptocurrencies.
Examples of smart money traders include large banks like JPMorgan Chase and Citibank, central banks, hedge funds, and prominent institutions such as insurance companies and global corporations.
The smart money strategy primarily involves analyzing the behavior of these significant market players. The core principle of the strategy is often summarized as "follow the smart money." Understanding and utilizing this strategy in trading is essential due to the influence of powerful investors on price movements. One of the main mistakes made by traders is neglecting this factor and solely relying on technical analysis. However, it is important to recognize that major market players are also familiar with these technical analysis algorithms and can anticipate how traders will react in specific market situations.
Consider the following example: Intraday traders identify a triangle pattern on the chart, characterized by converging price ranges forming an angle towards a single point. Based on their analysis, they anticipate an upward rally with a breakout above the upper boundary. However, the price unexpectedly bounces downward, only to recover its upward movement after a certain time interval. Such price behavior can be interpreted as the intervention of big players who were able to profit from the situation and force traders to close their positions due to stop losses.
Trading Strategies Of Banks
Trading strategies employed by banks involve several phases to maximize their profits in the forex or other markets. One commonly used strategy can be divided into three distinct phases.
Phase 1: Accumulation
The first phase is crucial for banks and serves as the foundation for the subsequent steps. Banks cannot enter a trade with their entire capital all at once, especially when they aim to create a significant market movement in their desired direction. This approach prevents retail traders from simply copying the banks' trades, which could lead to long-term issues.
To address this, banks accumulate entry points for long or short positions over a period of time. They strategically make small purchases or sales, depending on the market direction they seek to stimulate. For instance, if the banks aim to initiate an uptrend, they open numerous long positions at intervals of hours or days. While retail traders may perceive the market as consolidating or moving within support and resistance levels, they are actually witnessing the actions of the big players building their positions.
Phase 2: Manipulation
The second phase involves market manipulation, which can take various forms and is often known by terms such as "false breakout," "false push," "hunt stop," or bull/bear trap. During consolidation periods, retail traders frequently place pending trades above or below the consolidation zone, hoping to capture a breakout when it occurs. However, the banks strategically create false breakouts, triggering the activation of these trades and then abruptly reversing the direction, triggering stop losses. This manipulation is a key reason why many retail traders lose money.
Retail traders often lack effective breakout trading strategies and fail to consider where most traders have placed their stop losses. This lack of awareness makes them vulnerable to the banks' manipulation of the market, resulting in losses.
Phase 3: Allocation
The third and final phase is allocation, where banks make their last significant push in the desired direction. Their previously hidden positions become evident, creating potential profit opportunities for retail traders. As the market begins an uptrend and retail traders try to follow by opening buy trades, banks employ a contrarian approach. They sell when the crowd is buying and buy when the crowd is selling. This contrarian trading strategy allows banks to accumulate positions in preparation for a new trend that typically moves in the opposite direction.
At this stage, the price may enter an overbought or oversold area, indicating an imminent reversal. It is a critical moment for traders to be cautious and consider the banks' contrarian actions, as it signifies a potential shift in the market trend.
Applying Smart Money Strategy
One of the most popular strategies in smart money trading is the identification and utilization of Order Blocks. This strategy is based on understanding how banks and investment firms execute their trades in the market. When major players wish to buy or sell large volumes of an asset, doing so in one trade would significantly impact the asset's value, potentially reducing their profitability. To mitigate this, they often use order blocks to distribute their trades more evenly in the market.
Regular traders also benefit from this feature as it influences the price but in a more balanced manner than if the major player executed their trades all at once. On a Japanese candlestick chart, the starting point for placing an order block is a price pattern where the subsequent candlestick in a strong impulsive movement completely overlaps the previous one. For example, at the beginning of a bearish trend, a red candle overlaps a green one, and vice versa for a bullish trend. The order block zone often becomes a level to which the price tends to return after all the orders have been closed, providing potential trading opportunities.
In practice, the placement of an order block can serve as a signal for an impending reversal when the price reaches its peak. Depending on the color of the candle that initiates the order block, traders can open a long or short position, with green indicating an upward movement and red indicating a downward movement.
Smart money trading also involves the use of other price patterns, such as:
Imbalance or Fair Value Gap: This candlestick pattern depicts a rapid and significant price movement, either up or down, without opposing orders. It occurs when there is an absence of sell trades during an upward impulse or buy trades during a downward impulse. The area where the price moved too quickly becomes a level where the price is likely to return in the future.
Breaker Block: This pattern indicates that the price has surpassed the order block level. It can appear on the chart as a strong impulse candlestick that disrupts the existing price structure, potentially leading to a significant shift in the market.
By understanding and applying these price patterns and the concept of order blocks, traders can align their strategies with the actions of smart money participants and potentially improve their trading outcomes.
Example of Smart Money Concept chart.
Criticism Of Smart Money
The smart money strategy faces criticism from experienced traders who question its validity and practicality. One major criticism is that the strategy is based on postulates that are difficult to prove. It is argued that the notion of major players seeking to manipulate ordinary traders lacks concrete evidence. Additionally, the specific strategies employed by large investors and companies in the market are not clearly defined, and obtaining this information is challenging, often requiring insider knowledge that may not be readily available.
Furthermore, the smart money strategy is sometimes viewed with skepticism due to its complexity and the use of specialized terminology that differs from standard trading language. This complexity can be overwhelming for beginners, potentially hindering their understanding of other trading strategies. Moreover, since the smart money strategy originated in the traditional currency market, there are doubts about its applicability to other markets such as cryptocurrencies or stocks. However, it should be noted that there have been instances where the strategy has been successfully applied in these markets, debunking some of these doubts.
Overall, while the smart money strategy has its proponents, it is not without its critics who raise concerns about its empirical foundation, complexity, and applicability across different markets. Traders should carefully evaluate and assess the strategy's principles and techniques before incorporating them into their own trading approach.
Advantages And Disadvantages Of Smart Money Strategy
The smart money approach in trading offers several advantages, but it also comes with certain disadvantages. Let's explore them in more detail:
Advantages:
Reduced risks: Following the movement of smart money and basing trading decisions on it can help reduce risks. When traders accurately identify the actions of large investors, there is a higher probability of successful trades and lower chances of incurring losses.
Stability: The smart money strategy focuses on steady income rather than quick and large profits. It can provide a reliable and consistent approach for investors who prefer a more stable investment strategy rather than making short-term market forecasts.
Confidence: The concept of smart money can provide psychological comfort for many beginner investors. By aligning their trades with the actions of experienced and knowledgeable market participants, they may feel more confident in their investment decisions.
Disadvantages:
Reduced liquidity: One potential drawback of the smart money approach is that when large amounts of capital move in one direction based on the actions of major players, it can impact the liquidity of the asset. This can make it more challenging to enter or exit trades at desired prices, potentially leading to slippage or limited trading opportunities.
Speculative bubble risk: Following the movements of smart money can sometimes lead to speculative bubbles. In such cases, the interest in an asset is driven not by its inherent value but by a pattern of behavior among market participants. When the bubble reaches its maximum point, it can burst, causing a sharp decline in the asset's price.
It is important for traders to consider both the advantages and disadvantages of the smart money approach and assess their risk tolerance and investment goals before incorporating this strategy into their trading decisions.
Conclusion
The smart money trading strategy revolves around analyzing the actions of major players in the market, such as banks, hedge funds, central banks, and large institutions. It is crucial to grasp the fundamentals of this strategy to avoid solely relying on technical analysis and to align your trading approach with the movements of smart money traders.
Smart money traders follow a well-defined trading strategy that encompasses three key phases: accumulation, manipulation, and profit-taking. During the accumulation phase, these traders accumulate positions gradually to avoid significant market impact. In the manipulation phase, they may employ various tactics, such as false breakouts or stop hunting, to manipulate the market and catch retail traders off guard. Finally, during the profit-taking phase, smart money traders exit their positions and capitalize on their accumulated profits.
For retail traders, it is essential to learn how to identify and follow the trend established by smart money players. Understanding their behavior can provide valuable insights into market direction and potential entry and exit points. Additionally, using stop losses effectively is crucial to protect trades from unexpected market moves orchestrated by smart money traders.
Remember that comprehending the operations of smart money traders is a significant factor in achieving success as a trader. By studying their strategies and actions, retail traders can enhance their decision-making process and improve their overall trading performance.
📊 Smart Money Concepts: A Market Structure Showcase 📍What Is Smart Money?
Smart money is the capital that is being controlled by institutional investors, market mavens, central banks, funds, and other financial professionals. Smart money was originally a gambling term that referred to the wagers made by gamblers with a track record of success.
📍Principles of Smart Money Market Structure in Order Block Trading
Price moves within a structural of support and resistance. A breakout of the structural of support or resistance will lead to price movement in the next area of the support or resistance. When the price broke market structure was high the low point becomes a strong low. Strong Low is The Low that caused Manipulation and Break Structure (resistance).
Fresh high in an uptrend and fresh low in a downtrend. Weak Low/High is the Low that fails To Break Structure
🔹For every strong LOW, there is a weak High
🔹For every strong High, there is a weak Low
After a zone is tested many times or during a strong move, Supply and Demand levels eventually break. Due to the remaining orders being triggered and gradually removed, or an overwhelming number of orders in the opposite direction breaking the level.
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📊Liquidity GrabSmall and big players tend to acquire larger positions in the market than they can afford, in an attempt to benefit from the leverage. This is where the concept of liquidity grab comes into play. Large trades and institutional investors need to locate liquidity areas in the market to complete their trades. Stops and stop-loss orders are critical for survival in a leveraged market. Stop hunting is a common practice in Forex trading, where traders are forced to leave their positions by triggering their stop-loss orders. This can create unique opportunities for some investors, which is called a liquidity grab. Stop hunting is a trading action where the price and volume action threatens to trigger stops on either side of support and resistance. When a large number of stops are triggered, the price experiences higher volatility on more orders hitting the market. Such volatility in price generates opportunities for participants to enter a trade in a favourable environment or protect their position. The fact that too many stop losses triggered at once result in sharp moves in the price action is the reason behind the practice of liquidity grab.
📍 What is liquidity sweep?
In trading, a liquidity sweep is the process of filling an order by taking advantage of all available liquidity at multiple price levels. Traders use this method to ensure their orders are filled at the best possible price by breaking up their order into smaller sub-orders and spreading them across multiple price levels. Institutional traders and high-frequency trading firms commonly use liquidity sweeps for efficient and quick execution of large trade volumes.
📍 Liquidity Zones
Big players in trading aim for the best prices but face challenges finding sufficient counter-forces to fill their large orders. Entering the market at low liquidity areas creates more volatile markets, negatively impacting the average price. Conversely, entering at high liquidity areas results in less volatile markets, ensuring a better average price for the position. These liquidity zones are where stop-loss orders are placed, and the concept of "liquidity grab" comes from the need for big players to enter the market in these zones to take large positions. Traders use swing lows and swing highs to create these liquidity zones and place stops as reference points, resulting in either a reversal to the mean or a breakout of the level.
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