Over recent years, we have been hearing a lot about Smart Money Concepts (SMC) in Forex trading.
SMC is a highly controversial approach to trading. If you so much as bring it up on social media, there is a good chance you will inadvertently start a heated debate.
In this guide, we are going to explain why SMC is so controversial by going over its flaws.
But first, let us briefly explain what SMC is in case you do not have a clue what we are talking about.
What is Smart Money Concepts (SMC)?
Smart Money Concepts (SMC) is basically price action repackaged and described with different terminology.
SMC is presented with theories about what is going on in the markets and recommendations about how you should respond.
You will hear a lot of unfamiliar terms when you first start learning about SMC, such as "mitigation blocks," "liquidity grabs," and so on.
We are not going to go deep into SMC basics in this guide, because we want to focus specifically on SMC's flaws. If you have not already read it, we recommend you first read What is the SMC (Smart Money Concepts) Forex Strategy? for more information.
What are the flaws with SMC?
Now that you know a little bit about what Smart Money Concepts is, let us explain its disadvantages.
Keep in mind that calling these "flaws" is somewhat subjective. We will explain why as we go along.
Also, we are not saying you should not trade with SMC! It works great for some people, and we are not here to get in the way of that.
1. There is no evidence that the market works the way SMC claims.
From a theory standpoint, the biggest flaw with Smart Money Concepts is that there is no reason to believe that the market works in the way SMC claims. Moreover, there are reasons to believe it does not work that way.
SMC states the following:
- Market makers like banks are responsible for creating market movements, rather than retail traders (true).
- Market makers are trying to manipulate the markets.
- Market makers are actively trading against you as a retail trader, and are obsessively hunting your stop-losses.
- The reason for all this manipulation and stop-loss hunting is that market makers require liquidity.
What is wrong with all of this? Here are some of the issues:
- Market makers actually create liquidity.
- Market makers do not know exactly where your stop-losses are (to be fair, they probably could estimate it).
- Retail traders are small fry. Market makers really do not care about their existence. They are trading against each other.
Notice we did not say that market manipulation never happens. We just said that there are reasons to believe it does not happen the way SMC proponents believe it does.
So, why does it seem like the big banks are out to get you? Generally, what is happening is that you are caught in the crossfire. A huge institution did not take aim at you; it took aim at another giant institution, and you just happened to be collateral damage.
We would guess that one of the reasons SMC might appeal to different traders than regular price action has to do with ideological differences.
Those who do believe that big banks are out to get them simply find the SMC narrative compelling and appealing.
Key point:
There is no evidence that the theory behind SMC is correct. Logically, in fact, we have reasons to assert that it is incorrect. Market makers are not going after retail traders. They are creating liquidity. You are entirely irrelevant to them.
2. SMC traders falsely believe they are trading "like the banks."
Another flaw with SMC is that it is misleading. People who trade using this method believe that they are mimicking what the banks and market makers are doing, rather than trading like fellow retail traders.
But in truth, you need to remember that SMC is just a rebranded form of price action trading — the same price action trading that many other retail traders are using to choose their entries.
Just because an SMC trader is using "order blocks" rather than "supply and demand," that does not mean they are trading any differently than someone who is using "supply and demand."
Not only that, but what would it actually mean to teach someone to trade "like the banks?"
Institutions do not use just one set of trading strategies. Not only that, but they have access to tools and options that simply are not offered to retail traders. That means that there is a level of complexity involved in what they are doing that it may not even be possible for the typical retail trader to emulate.
Key point:
There is nothing to back up the claim that SMC teaches traders to trade "like the banks." If anything, there are reasons to believe otherwise. SMC is just retail price action under another name.
3. The language of SMC is unnecessarily confusing.
Here is a flaw in Smart Money Concepts which is entirely subjective and debatable: the very way that SMC is presented is confusing.
Some people disagree with this. SMC resonates with them. The way in which it explains concepts and names them fits their trading personalities.
There is nothing wrong with that! If that describes you, more power to you.
But many other traders are overwhelmed when they first encounter SMC jargon. And once they finally un-riddle it, they are frustrated to realize that they were already familiar with the concepts being described.
To circle back to the example we gave earlier, someone who has just struggled to understand what "order blocks" are might say, "Wait — this is just supply and demand. Why did I go to all this trouble to try and learn something new when I already know it as supply and demand?"
For traders who are already familiar with regular price action terms and who find price action intuitive, it may be a waste of time to try and learn Smart Money Concepts. Moreover, they may assert that this strange terminology was chosen in order to try and making SMC look and feel "exclusive" and inaccessible.
That said, SMC traders sometimes argue back that their concepts are different — that an "order block" is not precisely the same thing as "supply and demand."
Key point:
While SMC traders argue their concepts are unique, many traders consider it an alternative model for price action with everything renamed and repackaged. That renaming and repackaging can be confusing and frustrating for some.
4. Sometimes SMC does not even offer a clear explanation why something happens.
Previously, we talked a bit about the flaws with SMC's model of how institutions behave in the markets. But another criticism of SMC is that it does not always offer up explanations at all.
Take the "order imbalance" concept, for example. Smart Money Concepts traders like to trade imbalances, but they do not seem to explain why the price ranges tend to get filled. They do it because "it just works."
The typical rebuttal to this complaint is that one does not need to know why something works to know that it does work.
That is a valid response. One does not really need to understand the mechanics behind why a system works in order to use it effectively. One just needs to be an expert at identifying excellent trade setups on charts.
Most traders who use technical analysis or price action do not understand what is really happening in terms of the fundamentals when they trade; there is no need for SMC to be any different.
So, while this is a flaw, it is not necessarily a particularly detrimental one.
Key point:
Smart Money Concepts does not always seem to have explanations ready for why some things work. That said, one can trade effectively with SMC or other Forex methods without understanding why they work.
5. Some people do not like the attitudes of SMC mentors (or traders).
Another flaw of Smart Money Concepts has less to do with SMC itself and more to do with the behaviors of some of the people involved with SMC.
There are traders who do not like SMC who dislike it precisely because they feel that proponents of SMC are conceited, and overly persuaded of their "specialness."
They say that if they question anything about SMC, that traders and mentors of SMC will retaliate with over-the-top claims that they and they alone know the "correct" way to trade Forex. Sometimes SMC traders may even claim to know exactly what is happening in the markets with no uncertainty (which is simply not realistic).
That certainly does happen. That does not mean that all SMC traders behave that way, however. And there are plenty of non-SMC traders who also behave the same exact way about their own methods.
We would argue that this type of behavior is non-productive regardless of who is engaging in it, and we can certainly see how it could put someone off of a trading method. People think, "If there is so much toxicity around SMC, what does that say about the strategies?"
We would like to point out, however, that it is best to judge a method by its trading merits, rather than those who employ it. You do not have to like someone for that person to have a profitable trading method.
Key point:
One of the "flaws" of SMC is that the bickering over the rest of its flaws by the forex community can sometimes be a bit toxic. But this is a problem with certain traders and mentors, not with the strategies themselves.
Should you trade using Smart Money Concepts?
Now we have gone over some of the main flaws and criticisms of Smart Money Concepts trading. To review:
- The market does not work the way SMC says it does.
- SMC cannot always explain why its trading strategies work.
- The rebranded language of SMC confuses and upsets some traders.
- SMC does not really teach you to trade "like the banks."
- Some SMC traders and mentors may behave in a toxic way.
Based on these flaws, should you be avoiding Smart Money Concepts trading?
The answer comes down entirely to the individual. We suggest avoiding SMC if the flaws above irritate you, especially if you already know basic price action. SMC is not going to give you a special advantage over regular retail price action traders.
But if the flaws we went over do not put you off, and you find SMC intuitive and appealing, there is no reason not to give it a try. Its proponents report that it brings them consistent results when they apply it properly. So, it might suit you. Just try to stay realistic about what SMC is and is not. It is a workable rebranding of price action that uses a different model and terminology. It is not a holy grail that will let you trade like an institution.
