What Does Smart Money Mean in Trading? – Smart Money Trading

The concept of smart money trading refers to a trading and investment approach in which market participants try to take advantage of the positions of institutional investors and large investment funds. 

What is the Concept of Smart Money? What is SMC Trading? 

Smart money or SMC trading (smart money concept trading) is an investment approach where market participants follow in the footsteps of institutional investors and central banks to capitalize on market movements. 

Institutional players include large capital investors and speculators, such as major banks. These banks and institutions require liquidity to buy and sell in financial markets because their order volumes are significant due to the amounts they manage in their portfolios. 

Here’s a simple example: 

Many traders often complain about exiting trades at a loss, only to see the market move in the expected direction shortly after. This phenomenon is referred to as market manipulation, and both bull traps and bear traps can be encountered in online trading. 

Can we see on the charts where institutional investors intervene? 

Not every trade can be profitable, and the same applies to identifying price levels influenced by institutional investors. 

However, on charts, we can identify areas that were likely manipulated by smart money, i.e., the smart money concept. 

Smart Money Concept Trading – Order Blocks 

According to the smart money concept, an order block is a price zone that triggered a large number of buy or sell orders, likely as a result of the smart money trading strategy. 

These events leave visible and interpretable traces in the markets, particularly in trading charts, through the formation of specific lows or highs. 

Order block zones can be identified in different ways: 

• The last bearish move before an uptrend (last sell before a buy) 

• The last bullish move before a downtrend (last buy before a sell) 

This last bearish or bullish move can consist of the last bearish or bullish candle or a group of candles. 

SMC Trading – Imbalance or Fair Value Gap (FVG) 

Imbalance, also known as FVG (fair value gap), is a graphical method to identify relevant zones and order blocks on charts. The FVG consists of three candlesticks, and its formation follows this rule: 

If the wick of the third candlestick does not touch the wick of the first candlestick, an imbalance exists between the endpoints of the first and third candlesticks at the second candlestick's level. 

Imbalances reflect market inefficiencies and significant differences between supply and demand, which can result from the smart money concept trading strategy. In such cases, these zones must be aligned with order block zones. 

Several factors can cause these imbalances, such as economic news releases, political events, or the execution of large orders. 

According to the smart money concept trading approach, these imbalances represent visible traces of possible market moves initiated by institutional investors. 

Now that we have a clearer idea of the core of smart money trading, let’s move on to a key concept: liquidity. 

It is important to remember that the most relevant order blocks can be identified using imbalances. 

Smart Money Trading – Liquidity 

For traders following the smart money concept, understanding the principle of liquidity is essential. How does liquidity appear on charts? 

Liquidity can take various forms, such as: 

• Highs/lows 

• Double tops or double bottoms 

• Uptrends/downtrends 

Institutional investors seek this liquidity to activate their investment and speculation orders. 

This is one reason why many successful traders close some of their positions at a loss, even when they correctly identify the trend. 

Smart Money Trading – Market Trend 

To follow smart money, it is crucial not to limit technical analysis to a single timeframe. Institutional investors study market trends over relatively large timeframes and profit from them, so it is advisable to follow this process and try to trade in the same direction. 

To analyze smart money trends, the DOW theory can be applied. This theory helps understand the SMC trading strategy trend when observed over longer timeframes, allowing traders to intervene correctly on shorter timeframes while aligning with the underlying trend. 

Once the trend is identified, the next step is to understand the trading principles smart money traders follow in the markets—this is the essence of the smart money concept in trading. 

Smart Money Trading Strategy 

To gain a more comprehensive understanding of smart money strategy, here are its five pillars: 

• Market trend 

• Order blocks 

• Imbalance 

• Liquidity 

• Trend reversal 

Conclusion – Smart Money Trading 

The smart money concept (SMC trading) is still a relatively lesser-known approach in trading, but it highlights the difference between institutional investors (smart money) and retail investors. 

The smart money trading strategy focuses on identifying order blocks and imbalances to determine where institutional activity is concentrated. 

Following smart money requires a focus on liquidity in order to understand and predict potential market movements. 

Smart Money Concept Trading with the Tradensea Bot 

When applying the smart money trading strategy, it is crucial to monitor predefined price levels and market zones. This is where the Tradensea trading bot can be a highly useful tool, allowing traders to execute trades automatically at predetermined levels after their analysis. 

Using an automated system not only saves time and energy but also reduces the risk of emotional decision-making, as the bot operates strictly based on predefined settings. The Tradensea bot offers numerous safety features, enabling traders to secure even better entry opportunities while optimizing their trading strategy based on the smart money concept.