Most traders spend years trying to decode the financial markets with indicators that lag or systems that look great in hindsight but fall apart during market volatility.
Smart Money Concepts (SMC) strips away the noise so you can read the price in a way that actually works.
This guide covers the core ideas behind SMC and how they work together. Each section is designed to stand on its own and will eventually link to more in-depth training, videos, chart explanations, and more.
Let’s get started.
What Are Smart Money Concepts (SMC)?
SMC is a framework that helps you understand how and why price moves by studying liquidity, structure, and market inefficiencies instead of relying on a fair value gap indicator or traditional technical analysis.
The idea is simple. Institutional investors and hedge funds leave patterns behind through their institutional order flow. Those patterns repeat across every time frame and give price action traders a clearer way to read the chart.
When you study these behaviors, you start to recognize where price is trying to go. This gives you a cleaner perspective for informed trading decisions.
Why Smart Money Concepts Matter
Most retail traders react to price instead of reading it. SMC teaches you how to analyze market sentiment and understand the intention behind each move.
Smart money needs liquidity to execute large positions. This creates predictable behavior around highs, lows, liquidity zones, and supply and demand imbalances.
When you understand this behavior, price movements stop feeling random. You begin to see how a smart money trading strategy forms inside the broader market context.
Market Structure
Market structure is the foundation of any smart money trading strategy. You identify the trend through higher highs, higher lows, lower highs, and lower lows.
This gives you a clear roadmap so you know when the market is trending or ranging. It also helps you avoid false signals that come from rapid price movements.
With a clean market structure, you stop reacting to every candle and start making trading decisions based on the broader market context.
Break of Structure (BOS)
A BOS confirms continuation in the current trend and helps you understand when the market structure analysis has shifted.
You want to see a clean break and close beyond a previous swing high or low. This confirms strength and gives you clarity for your next trading strategy.
A strong break of structure often lines up with displacement or sharp price movements, which signals intent.
Change of Character (CHoCH)
A CHoCH marks the first sign that price may be shifting direction. It happens when price breaks a key swing against the current trend.
This helps you spot potential reversals before they happen. When CHoCH aligns with a bearish candle or a bullish trend loss, it’s even more meaningful.
A change of character becomes even more powerful when it happens inside a liquidity zone or after a sweep.
Internal vs External Structure
External structure uses the major swing points that define the broader trend. Internal structure highlights the smaller swings inside them.
Internal structure helps you refine intraday trading entries. External structure keeps you aligned with higher timeframes.
Using both gives you a better read on market context and helps you manage risk more effectively.
Liquidity
Liquidity drives every market. Price seeks out areas like swing highs, swing lows, and equal highs before making major moves.
Smart money uses these areas to trigger stop runs or fill positions. Understanding liquidity helps you avoid trading directly into traps.
Liquidity concepts also help you identify fair value zones and build stronger trading strategies.
Equal Highs and Equal Lows
Equal highs and lows attract liquidity. Retail traders see them as strong support and resistance, but they usually become targets.
Price often sweeps these levels before reversing or continuing in the same direction. This is a key element of smart money trading.
These levels play a major role in gap trading, FVG trading, and anything involving liquidity.
Liquidity Sweeps (Grabs)
A liquidity sweep occurs when price spikes above or below a level to trigger stops. This clears out traders before the real move begins.
Sweeps often occur during market volatility or rapid price movements and are followed by strong reversals.
My favorite way to trade market reversals is using a strategy called liquidity sweep reversals. It’s as simple as it is effective.
Price usually returns toward structure or the next imbalance once the sweep is complete.
Fair Value Gaps (FVGs)
Fair value gaps form when price moves too quickly and leaves pending orders unfilled. We call this inefficient market behavior
These zones act like magnets and are visited frequently during retracements. Many price action traders use FVGs to identify fair market levels.
Bullish fair value gaps and bearish fair value gaps help you time entries in both bullish and bearish trends.
Order Blocks
Order blocks mark areas where large positions were placed before a major move. They help you understand institutional order flow.
Think of order blocks as an institutional footprint. These footprints show where large buyers and sellers entered the market.
A bullish order block forms before a bullish expansion. A bearish order block forms before a bearish trend.
When price revisits an order block, you look for rejection or strength to build a trading method around.
Breaker Blocks
Breaker blocks occur when an order block fails and becomes a new support or resistance level.
This shows a significant shift in market direction. It means previous buyers or sellers were overwhelmed.
Breakers often form after sweeps, making them reliable for intraday trading and swing trading.
Imbalances and Voids
Imbalances appear when price moves directionally with little opposition. These areas are often filled later.
Voids highlight market inefficiencies and show where price may return during retracements.
These tools give you better clarity when planning entries or exits.
Price Rebalancing
Rebalancing occurs when the market fills inefficient price areas created by rapid price movements.
This behavior appears in both bullish trend expansions and bearish trend expansions.
Rebalancing often aligns with FVGs or order blocks and gives you a clean place to manage risk.
Premium and Discount Zones
These zones help you find overextended or undervalued areas based on your dealing range.
You buy in discount during a bullish trend and sell in premium during a bearish trend.
This concept keeps you from chasing moves and supports better position sizing.
You can use a simple Fibonacci tool to identify premium and discount zones. Everything above the 50% line is “premium”, and everything below the 50% is “discount.”
Optimal Trade Entry (OTE)
Optimal Trade Entry, or OTE, is a refined retracement zone that sits between the 62 and 79 percent levels.
This zone often aligns with liquidity zones or supply and demand imbalances, which increases probability.
Optimal Trade Entry is by far the simplest way to refine entries within premium and discount windows.
It works incredibly well in trending markets, especially on the 1-hour time frame or higher.
Supply and Demand Zones
Supply and demand zones show where buyers or sellers previously stepped in aggressively.
These areas often align with FVGs, order blocks, or liquidity zones, which adds confidence.
Supply and demand also help traders avoid false signals during sharp price movements.
Displacement
Displacement is a strong move that signals intent. It shows where institutional investors are active.
You look for sharp price movements or rapid price movements that break structure with force.
Displacement helps confirm market structure breaks and often follows liquidity grabs.
Propulsion Blocks
Propulsion blocks appear during aggressive expansions and act as markers for institutional order flow.
These blocks offer clean continuation setups when revisited.
They can be useful for both swing trading and intraday trading.
Change in State of Delivery
A change in state of delivery occurs when the market shifts from slow movement to aggressive displacement.
This usually follows liquidity grabs or major structure shifts.
Recognizing delivery changes helps you avoid false signals.
Balanced Price Range
A balanced price range shows where the market found fairness between buyers and sellers.
These levels often attract price during retracements.
Balanced ranges help you understand market context before planning your next trading decision.
Breakaway Gaps
Breakaway gaps form when price leaves an area without looking back. These appear during strong announcements or earnings reports.
These gaps show conviction and often support new trends.
Breakaway gaps can become targets during gap trading or FVG trading.
SMT Divergences
SMT divergence compares related markets to identify shifts in sentiment.
When one market sweeps liquidity and the other does not, it signals imbalance.
SMT helps confirm smart money trading strategies when used with structure and FVGs.
SMC Entry Models
Entry models combine liquidity, structure, gaps, and imbalances to form a clear trading strategy.
Common entry models include liquidity sweeps into fair value gaps or bullish fair value gaps forming inside a bullish trend.
These repeat often, making them easy to study using historical data.
SMC Trading Strategies
Smart Money Concepts trading strategies explain how individual SMC concepts are combined and applied in real trading conditions.
A strategy defines the order of operations, such as how higher-timeframe structure, liquidity, and market context work together before any entry is considered.
This helps reduce randomness and maintain consistent execution.
The #1 goal of a trader should be to remove emotions as much as possible and make trading as mechanical as possible. That’s what a proper SMC trading strategy does.
London Session Behavior
London session movement involves clean displacement and liquidity grabs. It often sets the high or low of the day.
Price tends to follow the same direction after London shows its hand. This makes it an important window for intraday trading and for understanding early market sentiment.
London also creates many of the liquidity zones that New York will later react to, which helps you plan your trading strategy with more clarity.
New York Session Behavior
New York session builds on the movement created during London. You often see liquidity sweeps at the open followed by sharp price movements.
The AM session can give continuation or fast reversals depending on market conditions. The PM session usually becomes slower but cleaner.
New York is where many intraday moves complete, so understanding these rhythms helps you make more informed trading decisions.
Power of Three
Power of Three describes accumulation, manipulation, and distribution. It shows how institutional investors build and execute a move.
The market often ranges first, sweeps liquidity, and then expands in the same direction. This sequence appears often during high volatility.
Once you recognize this pattern on price charts, you start planning trades with more confidence.
Stop Placement Using SMC
Stops should sit beyond the structure that invalidates your idea. This prevents you from getting stopped out by minor fluctuations.
Good stop placement also helps you manage risk and position sizing. It forces you to define why you are in a trade.
Using liquidity zones for stops gives you cleaner risk management and fewer false signals.
Liquidity-Based Take Profits
Liquidity-based targets help you lock in profits consistently. Price gravitates toward equal highs, equal lows, imbalances, or old swing points.
These price levels give you predictable exit points. They also remove the guesswork that leads to emotional trading decisions.
Using liquidity as a guide lets you take profits in the same direction as institutional order flow.
Confirmation vs Anticipation Entries
Confirmation entries are when you wait for the market to actually show its hand. That usually means a clean break in structure or real displacement, not just a random candle spike.
Anticipation entries get you in earlier, but they take more experience because you’re basically reading the intent before it fully plays out. When you get good at spotting the story behind a move, these can work really well.
Both styles can work. The key is knowing when the chart is giving you something real and when it’s just noise. As long as your risk is defined, you can use either approach without blowing up your account.
How to Backtest SMC
Backtesting shows how often SMC patterns appear across historical data. It helps you build confidence without risking real money.
You want to study structure, liquidity sweeps, displacement, and rebalancing. These elements repeat across all price charts.
Backtesting also helps you improve your gap trading strategy and refine your trading method.
Common SMC Mistakes
Here are a few mistakes I see all the time when traders start learning SMC:
Trying to learn everything at once
SMC has a lot of moving parts. If you try to master BOS, CHoCH, FVGs, order blocks, and liquidity all in one shot, you will confuse yourself. Start with structure and build from there.
Marking every fair value gap or order block on the chart
Not every FVG or order block matters. Traders clutter the chart and then wonder why nothing makes sense. Focus on the ones tied to real structure shifts or displacement.
Ignoring higher timeframes
Most mistakes come from only watching the 1 minute or 5 minute chart. If the higher timeframe is not aligned, you will get chopped up fast.
Trading every BOS or CHoCH like it is a setup
A structure break by itself is not a trade. You need context, displacement, and liquidity. BOS and CHoCH just tell you the story. They do not complete the setup.
Entering too early during a liquidity sweep
A sweep looks tempting, but price often needs time to stabilize. Traders jump in too soon and get stopped out before the real move starts.
Ignoring market sentiment or news events
SMC works great, but it does not cancel out volatility from news or earnings. If you ignore the calendar, you can get blindsided.
Forcing SMC onto sideways markets
SMC shines in clean trends and during real movement. In a tight sideways range, everything looks like a setup. Most of it is noise.
Not having a risk management plan
Even a perfect SMC read can fail. If you size too big or place stops too tight, the market will take you out before your idea plays out.
Overconfidence after a few wins
SMC gives clarity, but it does not remove randomness. Losing trades still happen. Staying grounded is part of surviving long term.
Frequently Asked Questions
What is smart money concepts?
Smart Money Concepts is a way to read the market using structure, liquidity, and price action instead of indicators. It helps you understand why price moves and what larger players might be doing. Once you learn the basics, the chart starts to make a lot more sense.
How is SMC different from traditional technical analysis?
Traditional technical analysis leans on indicators. SMC focuses on price movement, liquidity, and what institutions might be doing. It gives you cleaner levels and a clearer read on intent.
Is smart money concepts legit?
Yes, SMC is legit. The concepts come from real market behavior like liquidity grabs, structure shifts, and imbalances. It is not a shortcut and it still requires discipline, but the logic behind it is solid.
Is SMC good for beginners?
SMC can work well for beginners because it focuses on price itself. Start with structure and liquidity and build from there. Keep it simple in the beginning.
Does smart money concepts work?
SMC works when you understand the context. Things like BOS, CHoCH, and FVGs give you a clearer read on direction, but you still need patience and risk management. When you combine those, SMC becomes a very effective way to trade.
Does SMC work in forex, crypto, stocks, and commodities?
Yes, SMC works across all major markets because structure and liquidity exist everywhere. Forex will look cleaner. Crypto moves faster. Stocks react to news. The concepts stay the same. You may just adjust your timeframe or risk.
