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Home » » Do You Know What the Smart Money Concept (SMC) Is?

Do You Know What the Smart Money Concept (SMC) Is?

 

The Smart Money Concept (SMC) is a trading approach that integrates fundamental ideas from traditional Forex theory, such as supply and demand, price patterns, and support and resistance, but with different terminology and methods of explanation. SMC is often used by traders who believe that the market is dominated by "smart money," which consists of large entities like banks and hedge funds that have the power to influence market price movements.

Basic Ideas and Terminology of SMC

For those new to SMC, the terminology might sound technical and confusing. However, with a deeper understanding, many SMC concepts are essentially variations of traditional trading theories that have long been recognized. Some key terms in SMC include:

  1. Order Block: In SMC, an order block refers to an area where supply and demand occur. Some SMC traders consider this concept to be more specific than the general notion of supply and demand. In this context, support and resistance areas are often referred to as "breaker blocks" and "mitigation blocks."
  2. Fair Value Gap: This term refers to an imbalance in market prices. This type of gap has been recognized in trading for years, with various types such as common gaps, exhaustion gaps, separation gaps, and runaway gaps.
  3. Break of Structure (BOS): SMC emphasizes the importance of changes in market structure, identified as BOS. This marks the moment when prices break through key levels, indicating a potential change in trend direction. After understanding these terms, traders familiar with basic trading concepts will realize that many SMC principles are already known, just under different names and approaches.

Advantages of SMC

SMC appeals to some traders because it simplifies price analysis and offers a new perspective on how the market functions. For those comfortable with this method, SMC can help in understanding price movements and making better trading decisions. SMC also has a strong foundation as it combines elements of price analysis that have proven effective across various assets, not just currencies. For some, repackaging old concepts in the SMC format makes them easier to understand and apply. While there is some skepticism about the role of major institutions in manipulating the market, concepts like liquidity grabs do occur and can be observed in various market scenarios. This suggests that some elements of SMC theory may be realistic, even if not always as portrayed by SMC.

Disadvantages of SMC

However, SMC has its drawbacks. Some theoretical aspects of SMC seem irrelevant when considering the small impact of retail traders on a market dominated by major players. This can lead to misunderstandings about how the market actually functions. 

Moreover, there is no evidence to confirm or refute the theories behind SMC, due to its speculative nature. This means that belief in the SMC model is based on assumptions rather than concrete proof. 

The use of complex terminology in SMC can also be a barrier, especially for those accustomed to more traditional price action language. This can make the learning process and sharing knowledge with other traders more difficult. Finally, although there are many free resources on SMC, much of the in-depth training on these concepts often comes at an additional cost, which may not be worthwhile for some traders.

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