Charts and indicatorsUpdated 3 min readBy the FXNOD team
Smart money concepts (SMC): the terms, and an honest assessment
Smart money concepts, or SMC, is a style of price action trading that explains market moves as large institutions seeking liquidity. Its vocabulary includes order blocks, fair value gaps, liquidity sweeps and breaks of structure. Much of it renames established ideas such as support, resistance and false breakouts. The claims about what institutions intend cannot be checked from a chart.
The vocabulary
| SMC term | What it describes | Older name for a similar idea |
|---|---|---|
| Order block | The last opposing candle before a strong move | Supply or demand zone |
| Fair value gap | A gap left between candles in a fast move | Imbalance, or simply a gap |
| Liquidity | Clusters of stop orders beyond highs and lows | Stops above resistance, below support |
| Liquidity sweep | A push through a high or low that reverses | False breakout, stop hunt |
| Break of structure | A new swing high or low in the trend's direction | Trend continuation |
| Change of character | The first break against the trend | Possible reversal |
| Premium and discount | The upper and lower half of a range | Expensive and cheap within the range |
The core story
Large participants need many orders on the other side to fill their own. Those orders are found where retail stops cluster, beyond obvious highs and lows. So the price is drawn to those areas, takes the stops, and then moves the other way. The trader's job, in this view, is to wait for the sweep and join the move that follows.
What is sound in it
- Stops do cluster beyond obvious levels, and false breakouts are common.
- Waiting for a sweep and a reaction is more patient than buying every breakout.
- It makes traders think about where others are positioned.
- Structure and levels are real, whatever they are called.
What to be careful about
- Intent cannot be seen on a chart. Any move can be explained afterwards as institutions hunting liquidity.
- Order blocks and gaps are so numerous that the price is nearly always near one.
- The method is discretionary, so it is hard to test and easy to believe.
- Much of it is sold through paid courses, by people whose income is the course.
- Retail forex charts show one broker's prices, not the whole market's orders.
SMC and ICT
ICT refers to a particular teacher's body of material, from which much of the SMC vocabulary comes. In everyday use the two overlap heavily. Different teachers define the same terms differently, which is another reason to judge any version by tested results and not by its vocabulary.
A fair way to use it
Write exact rules
Define what counts as an order block or a sweep before looking at the chart.
Test them
A hundred trades, recorded, with screenshots.
Keep what survives
Usually: trade with the higher-timeframe trend, wait at levels, and do not chase breakouts.
On synthetic indices
SMC is a theory about participants and their orders. A synthetic index has neither. Deriv says there is no order book. Applying smart money concepts there has no basis, however convincing the chart looks.
Questions people ask
- Does smart money concepts trading work?
- Parts of it restate ideas that have value, such as trading with structure and waiting at levels. Its larger claims about institutional intent cannot be verified.
- What is an order block?
- The last candle against the direction of a strong move, treated as an area where the price may react if it returns.
- What is a fair value gap?
- A three-candle formation in which the first and third candles do not overlap, leaving a gap that the price is said to revisit.
- Is SMC better than support and resistance?
- It is largely a different vocabulary for overlapping ideas. Judge either by recorded results.
Put it on a chart
Trade Pilot's chart has moving averages, RSI and Bollinger Bands, and a bot in Bot Forge can use indicators to choose its side. Try both on your Deriv demo account.
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