If you have been anywhere near Forex forums or social media lately, you have no doubt been hearing people talk about Smart Money Concepts (SMC) trading.
You may be wondering what SMC is, and whether it deserves all the hype. In this post, we will introduce Smart Money Concepts trading to you so you can make an informed decision about whether or not to give this strategy a try in your own trading.
What is SMC Forex trading?
The simplest way to describe Smart Money Concepts trading is to say that it is price action by a different name.
SMC involves using classic Forex concepts like supply and demand, price patterns, and support and resistance to trade, but that everything has been given new names and described in a different way.
SMC traders refer to ideas like "liquidity grabs" and "mitigation blocks." While their terminology may sound foreign, when you examine SMC, you will realize it is a more traditional trading approach than it appears at a glance.
Let's get something out of the way upfront. There is nothing wrong with anyone using SMC if it works for them. That said, we are going to be critical of some aspects of SMC in this post, so be ready for that.
SMC theory
SMC is not just a Forex trading strategy, but an entire philosophy about how the markets work.
Basically, SMC states that market makers (i.e., banks, hedge funds, etc.) are manipulative entities, and that moreover, they are actively making life difficult for retail traders.
According to SMC, as a retail trader, you should base your strategy on what is happening with the "smart money" (i.e., the money belonging to market makers).
Indeed, you should try and pattern your trading off of how these market makers are trading. They are concerned with supply, demand, and market structure. So, as an SMC trader, that is also what you are looking at when making your own trade decisions.
Where did SMC Forex trading come from?
Smart Money Concepts originated with The Inner Circle Trader (ICT), which is a program offered by a trader named Michael J. Huddleston. ICT offers some free resources as well as paid Forex mentorship.
SMC core concepts and terminology
SMC sounds highly technical when you first start reading about it. You may find yourself scratching your head at the basic vocabulary. To help you out, here are explanations of some common terms used by SMC traders:
- Order blocks: This terminology is used to discuss supply and demand. Some SMC traders say that order blocks are a more "refined' concept than regular supply and demand, but others contest this claim.
- Breaker blocks and mitigation blocks: These terms refer to support and resistance.
- Fair value gaps: This term refers to an imbalance. There are a variety of different types of gaps, and they were all identified years ago. Some examples are common gaps, exhaustion gaps, breakaway gaps, and runaway gaps.
You will discover that other SMC concepts also are familiar to you once you figure out what the fancy terminology is referencing.
When analyzing the markets, SMC focuses a lot on "break of structure" in the market, or "BOS."
Here is a chart illustrating breaks of structure. Every time price surpasses the previous high, there is break of structure. We then see a change of character (ChoCH) as price drops down past previously established lows.
Controversies about Smart Money Concepts in Forex trading
SMC is controversial for a few key reasons:
- The theory behind it is incorrect.
- SMC is not "trading like the banks."
- Even though it can work, it is not new.
The flaws in the theory
What is the flaw in the theory behind SMC? It comes back to what we mentioned earlier about market makers.
SMC traders say that manipulations by "smart money" actors are why certain SMC patterns are forming. But SMC does not provide any evidence that these manipulations are occurring or are responsible for the patterns.
There is little logic in declaring that smart money manipulations are creating the patterns. It is true that banks and other large players are what move the markets. But it is not true to say that these market makers are out to get retail traders and are actively conspiring to manipulate the markets. Instead, their role in the markets is to create liquidity.
Simply put, market makers do not care about your existence. Retail traders are just not that significant in the grand scheme of things, even when you add them all together.
Does this mean market manipulation is entirely a myth? No. It does happen, but not in the way that SMC describes.
No different from regular retail trading
SMC traders believe that they are trading like the market makers rather than trading like other retail traders, and that this gives them an edge that their fellow retail traders lack.
In truth, SMC traders are trading exactly like their fellow retail traders. They are not trading "like the banks."
New terms, old concepts
Finally, all of the repackaging and fancy terminology is a source of irritation for a lot of traders.
ICT has made a lot of money off of teaching traders SMC. There is nothing wrong with that per se, since they are teaching methods that can be useful. But some traders feel that presenting these old concepts as if they are brand new is disingenuous in some way.
To add to that, having to learn all of those new terms adds a level of unnecessary complication to the entire thing.
SMC does not so much reinvent the wheel as it simply rebrands the wheel, putting it in a fresh new package. It is still a wheel. It turns in the exact same way and can get you to the exact same destination.
Why go to the trouble to learn a new language to discuss something with which you already are probably familiar?
For most (though not all) traders, it is simply going to be easier to talk about support and resistance.
Pros and cons of SMC
Pros of SMC:
- Smart money concepts trading does seem to work for some traders. If it works for you, there is no reason not to use it. Being able to consistently grasp what price is doing and profit from its behavior is more important than knowing why price is moving the way it is.
- Price action has a decades-long history of producing results for many people across not just currencies, but other assets as well. Since SMC is repackaged price action, it does have a solid core.
- Some people find price action easier to understand when it is presented as SMC.
- While the theory that large institutions are targeting retail traders is dubious, it does seem plausible to suggest that larger institutions may sometimes go after smaller ones, generating some of what we are seeing. Liquidity grabs do exist, even if SMC is presenting them in a questionable framework. So, some of the theory elements of SMC may be viable, just not as SMC describes them.
Cons of SMC:
- Some of the theory elements of SMC do not appear to make a lot of sense when you think logically about how irrelevant retail traders are to the big players. Believing wholeheartedly in everything SMC presents could result in misunderstanding market fundamentals.
- One can neither prove nor disprove the theories behind SMC. They are purely speculative, and only an insider would be able to produce concrete evidence in either direction. That means that no one can verify that SMC's model of reality is correct, but no one can 100% refute it either. All anyone can do is argue based on what they believe about what institutions do.
- Switching up all the terminology the way SMC does can make for an unnecessarily convoluted learning process for price action, especially if you already are familiar with the standard language of price action. It may also make it harder for you to share what you learn with others who speak the regular price action language.
- A lot of people are turned off by the elitist mystique surrounding SMC, and feel it is deceptive to sell old concepts as if they are new. Also, we are using the word "sell" here very literally. While there are a lot of free SMC resources, you will run into plenty of pay gates while trying to learn SMC.
Should you trade using SMC?
Smart Money Concepts trading would probably not be as popular as it is right now if some traders did not find it intuitive.
If you do like how SMC expresses its terminology and techniques, then by all means, go ahead and give it a try.
Just be aware that the strategy is a repackaged form of good old-fashioned price action trading, and that you are doing the same thing as many other retail traders.
But there is nothing wrong with that, because good old-fashioned price action trading is a tried and true method that has been profitable for many traders for decades.
If the strange terminology of SMC confuses you or you are looking for more free resources (there are paywalls for many SMC programs), just study price action. You will be learning the same thing anyway.
