Smart Money Concepts
If you’re active in any of the online trading communities, you’ll be familiar with SMC or Smart Money Concepts. This trading style has exploded over the last 6 months, with many of the more influential retail traders adopting this strategy and obtaining funded trading accounts. But, is this really the holy grail of trading?
In this article, we’re going to look at where SMC originated, its impact on getting prop firm funded and the reality of trading forex like an institution. So, let’s get into it…
Smart Money Concepts – What Is This?
Smart Money Concepts or SMC for short, are a group of trading techniques used by retail traders to find pools of imbalance and liquidity within forex pairs. These order blocks are located and traded off by utilizing various entry methods. Typically, the entry methods all involve a sweep of a high or low, a break of market structure, then a pullback to an area of liquidity or an order block. In terms of higher time frame analysis, not much seems to be done, with most SMC traders focusing on the lower time frames. Most entries and trade markups seem to be undertaken on the M5 or M1 time frames, allowing for quick entries and intraday positions.
This technique has been used by Inner Circle Trader (ICT) for many years and became quite popular in the YouTube trading community. The elusive background of ICT and seemingly pinpoint accuracy in the markets made this quite appealing to many traders. Many screenshots from TradingView and MT4 were shared on social media of traders obtaining 1:50+ RR trades, with pinpoint entries… Which got the world of retail traders thinking…
Differences Between SMC Trading & Typical Price Action Trading Strategies
SMC trading is almost marketed as being better than standard price action or technical analysis, due to the fact you’re now trading on the side of banks. However, is this true? Well, not really!
There are a huge number of similarities between standard technical analysis and SMC concepts. In fact, with SMC, you’re still not looking at any real liquidity or order blocks. You’re perceiving what could, in fact, be order blocks within candlesticks and drawing these on your charts. This is no different from conducting technical analysis, as you aren’t looking at footprint price data, only drawing patterns from candlesticks. Does this mean SMC doesn’t work? No, not at all! We’re confident that SMC trading works just fine, much like technical analysis.
There are three main reasons for this…
- SMC encourages high risk to reward ratios.
This is the main reason SMC trading works. You’re able to net high risk to reward trades. This will be crucial for staying profitable on a funded trading account. - SMC traders focus on trading at times of high volume.
By trading at specific session timings during the day, traders can capitalize on real market movement and volatility. This is useful in all trading strategies and something many traders overlook. - SMC encourages traders to focus on lower time frames.
By trading the lower time frames, you open yourself up to being able to trade a huge number of trades per month or quarter. When compared to a swing trader that takes 1 or 2 positions in the month, it is clear that the intraday trader will most likely net better returns, if they have a profitable edge in the markets!
For these reasons, there is a slight difference between technical analysis and SCM within forex trading. However, the majority of the approach is the same – just dressed up to appear more intelligent!
Will Trading SMC Help You Become A Profitable Trader?
The question whether trading SMC will actually make you a profitable trader is really the wrong question to ask. Sadly, as a retail trader looking to trade subjective strategies, there is not a holy grail strategy. In fact, most profitable strategies will only have a small edge over the markets. To that end, SMC is not a holy grail strategy – it’s just another strategy. However, the risk management, risk reward ratios, trade timings and high trading volume are likely to get you from A to B faster, than swing trading for instance. Currently, there is no data to prove that SMC traders are any more profitable than retail traders just focusing on their basic technical analysis. As the saying goes, ‘there are a thousand ways to skin a cat’.
If you’re interested in trying the strategy in your own trading, there is a huge amount of free resources online, including on YouTube, where you can learn the strategies and build your trading plan.
As always, it’s recommended to back test this trading strategy first, then use demo capital before seeking prop firm funding or approaching this on live capital.
The Reality Of Trading Like Institutional Traders
The reality is that Smart Money Concept traders are not mirroring institutional order flow or behavior at all. In fact, you won’t find a professional trader within an institution, sitting on TradingView and analyzing charts. Professional traders reading tape and utilizing order flow are using footprint charts. Footprint charts can be used to show delta and various other data types that can show the real flow of money in and out of the markets. More retail traders are adopting footprint charts, which is great to see! Although, we must say, trading in this way is typically much harder and requires a much more profound understanding of financial systems than most traders have.
It’s important to realize that you don’t need to trade like an institutional trader to make money in the markets! There are considerable differences between how professional traders make their returns and how retail traders get involved in the markets. The analysis is different, returns vary greatly, and you don’t need to be trying to mirror those folks in our to make a living from forex trading!
If you’re serious about wanting to trade with the banks, you’re better off learning to read footprint charts than you are learning to trade Smart Money Concepts! However, neither is better than the other!
In Summary – Are SMC Traders Lying?
In conclusion, SMC could be a great way for you to trade the markets, but so could more basic versions of technical analysis! There are certainly some great lessons to be learned from SMC traders, including trading at optimal session times, using high risk to reward ratios and obtaining decent frequency within your trading. With that being said, these learnings can be applied to any strategies, whether SMC or using trend lines – it doesn’t matter!
If you trade SMC, we’d love to hear your journey in the comments – did you have success before learning to trade SMC?
Are you looking to become a prop firm funded trader? Work with Lux Trading Firm now!
