Are you getting stuck in finding the profitable trading setup using traditional strategies? Do you get caught up in market manipulation and don’t know where to place your entries and exits?
This is a robust trading strategy that allows traders to see the action of institutional players. It, therefore, leads to better and profitable decisions. We are going to explain how combining leading and lagging indicators in the SMC framework can ensure success in the markets for you.
In this article, we are going to break down a step-by-step guide to SMC, from understanding directional bias and identifying areas of interest to avoiding common retail traps. By mastering this strategy, you can follow the market moves made by institutional players and increase your chances of making profitable trades.
Step 1: Building a Directional Bias
First, you must be able to generate a clear directional bias. A directional bias is your underlying foundation for knowing whether the market is to trend upward as bullish or downward as bearish. This step, therefore, provides the essential key to ensuring all your trades find alignment with a broader market trend.
Bullish Market Structure
When the market is trending upwards, you’ll observe a series of higher highs and higher lows. Your job here is to only look for buy opportunities, identifying breaks of structure to enter long trades at pullbacks.
Bearish Market Structure
Once the market turns and starts to make lower lows and lower highs, your bias should shift to bearish. Sell when the market breaks structure to the downside.
This process of identifying market structure and bias allows you to stay in sync with the overall market trend.
Step 2: Finding Areas of Potential Interest
In the second stage, we highlight areas where the bigger players or institutional traders have entered. It is an essential understanding because these usually drive large, aggressive moves.
After some ranging, where price whips from a tight range, the market will move aggressively in one direction. Here, the watch is for the three-candle sequence that leads to the aggressive move. Two of them will form the range, and the third breaks it up.
Fair Value Gap
A gap often forms between the high of the first candle and the low of the third candle after an aggressive price move. This gap is a “Fair Value Gap” and typically gets filled when price returns to this area. This is where institutional traders likely placed their orders, and price will revisit this area for them to complete their positions.
When price retraces to these levels, look for confirmation before entering. This confirmation could be an internal change of character or a reversal pattern, signaling the right time to trade.
Step 3: Identifying and Avoiding Retail Liquidity
Now that you’ve identified your areas of interest, it is critical to know where retail traders are likely placing their stop losses and take profits. These are areas of liquidity, and institutional traders can manipulate the market to trigger these orders before moving in the desired direction.
What is Liquidity?
Liquidity refers to the orders that market participants, in the main, retail traders, have placed in the market. This includes their entries, stop losses, and take profit levels. Institutional players will often target these areas of liquidity to fill their orders at better prices.
Retail Liquidity Traps
Retail traders tend to make similar plays, whether it’s buying at support or selling at resistance, creating known entry points. Institutions know exactly where these orders are and can push price to these areas to trigger stop losses before reversing in the direction they want to go.
Time-Based Liquidity
In addition to price levels, time can also create liquidity. For example, at the London or New York open, retail traders will often scramble to get into the market. This scramble can create a spike in price, and institutions can use this to their advantage by trapping traders into entering at the wrong time.
Combining the Three Steps
To trade successfully using Smart Money Concepts, one needs to combine all three steps:
- Determine the Market Bias: Determine if the market is bullish or bearish.
- Find Areas of Interest: Look for institutional activity at price levels where large players have entered, such as fair value gaps or ranges followed by aggressive moves.
- Avoid Retail Liquidity Traps: Identify where retail traders are placing their stop losses and take profits, and avoid entering trades in those areas. Or, you can use these liquidity zones to your advantage, targeting these areas with your trades.
By combining all three elements—directional bias, areas of institutional interest, and liquidity analysis—you will be able to make better decisions, avoid common retail pitfalls, and position yourself in line with the big players in the market.
Conclusion
Mastering Smart Money Concepts involves understanding market structure, knowing where institutional interest is most likely to be, and knowing where retail traders are likely to get caught. Altogether, these elements help enable precision in navigating markets, evading the dangerous areas that lead to losses.
Whether it’s just a starting point or more of a refinement of strategy, these tips will bring you closer to the goal of becoming a profitable trader. Remember that the entire essence of success in trading is about always staying ahead of the market, and with the correct combination of indicators, using SMC can help you do that.
