Smart Money Concepts

A XAUUSD chart with Smart Money Concept Analysis

Smart Money Concepts (SMC) is a trading methodology in technical analysis that analyzes price action through the lens of institutional order flow, liquidity, and market structure. It was popularized by Michael J. Huddleston, known as The Inner Circle Trader (ICT), and is widely used in forex, stocks, and futures trading. ^[1] SMC differs from traditional retail trading strategies by focusing on how large financial institutions manipulate price movements to create liquidity and execute orders.

Overview

Smart Money

Smart money refers to capital managed by institutional investors, central banks, and financial professionals with deep market expertise. These investors analyze economic trends, data, and insider insights to make profitable decisions, often influencing market movements. Unlike retail investors, who may rely on speculation, smart money follows strategic investment approaches backed by research. The term originated in gambling, where it described bettors with insider knowledge or advanced skills. In financial markets, tracking smart money can help identify trends and potential opportunities, as these investors typically have access to superior resources and market intelligence, giving them a competitive advantage. Smart Money Concepts emphasize institutional trading behavior over conventional retail trading strategies that rely on indicators such as moving averages, Relative strength index (RSI), or MACD. The core idea is that price moves in a structured manner, driven by institutional traders (the so-called "smart money") rather than random market fluctuations. ^[2]

SMC elements are identified by the price movements occurred due to the smart money moves in the market like an insider news as Smart Money also referred as "money ventured by one having inside information or much experience" ^[3]

Traders who use SMC focus on understanding key market movements like liquidity grabs, order blocks, fair value gaps (FVGs), and stop hunts ^[4] These concepts help traders identify high-probability trade setups based on how large players enter and exit the market.

Core Concepts

Market Structure

SMC traders analyze market structure to determine trends, reversals, and continuation patterns. Market structure consists of:

• Higher Highs (HH) and Higher Lows (HL) in an uptrend
• Lower Lows (LL) and Lower Highs (LH) in a downtrend
• Break of Structure (BOS)** and Change of Character (ChoCh) to identify trend shifts

Liquidity & Stop Hunts

Institutions manipulate price to grab liquidity from retail traders before making significant moves. Liquidity is found at:

• Equal highs and equal lows (double tops/bottoms)
• Previous swing highs and swing lows
• Psychological price levels

Stop hunts occur when price is driven toward these liquidity zones before reversing.

Order Blocks (OB)

An Order Block is a zone where institutions have placed large buy or sell orders. These act as key levels of support and resistance. Traders look for price reactions at these zones to anticipate market moves. ^[5]

Fair Value Gaps (FVGs)

A Fair Value Gap (FVG) is an imbalance or inefficiency in price action, where price moves aggressively in one direction, leaving a gap between candles. These gaps often get filled later, making them useful for trade entries. ^[6]

Breaker Blocks & Inducement

• Breaker Blocks are failed order blocks where price reverses and breaks structure, signaling a new trend.
• Inducement refers to the market creating fake setups to lure traders into taking positions before the real move happens. ^[7]

Comparison with Other Trading Strategies

Comparison of Smart Money Concepts and Retail Trading

Concept	Smart Money Concepts (SMC)	Retail Trading
Market Drivers	Institutional order flow	Retail indicators (RSI, MACD, etc.)
Key Focus	Liquidity, price manipulation	Support & resistance, trendlines
Entry Methods	Order blocks, fair value gaps	Candlestick patterns, moving averages
Risk Management	Based on liquidity & market structure	Fixed stop-loss & take-profit

Criticism

Despite its popularity, Smart Money Concepts have been criticized for: ^[8]

• Lack of academic backing** – SMC is not widely recognized in traditional finance literature.
• Complexity** – Many traders find the concepts difficult to grasp compared to retail trading methods.
• Subjectivity** – Identifying order blocks and liquidity zones can vary among traders.

See Also

• Wyckoff Method
• Price Action Trading
• Forex Trading
• ichimoku

Further reading

• Street Smarts by Linda Bradford Raschke

References

1. "The Inner Circle Trader - Forex Factory". Forex Factory. Retrieved 2025-02-11.
2. https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/smart-money/#:~:text=Smart%20money%20refers%20to%20the,make%20most%20of%20the%20profits.
3. https://www.merriam-webster.com/dictionary/smart%20money
4. John J. Murphy (1999). Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. New York Institute of Finance.
5. "DailyFX Order Block Analysis". DailyFX. Retrieved 2025-02-11.
6. "ForexLive Market Imbalances". ForexLive. Retrieved 2025-02-11.
7. Richard D. Wyckoff (1931). The Richard Wyckoff Method of Trading and Investing in Stocks. Wyckoff Analytics.
8. "Criticism of Smart Money Concepts". BabyPips. Retrieved 2025-02-11.

External Links

• The Inner Circle Trader – Forex Factory
• DailyFX Order Block Analysis