The liquidity at these spots can be used by smart money to fill trades. There are some general concepts a trader can use to identify the objectives of smart money. They claim to help to identify what smart money is doing. These terms are usually marketing terms and refer to more common concepts, such as supply and demand. The most important things you need to know about how smart money operates are liquidity and building positions.

Liquidity means the ability for a market to be traded. Generally speaking, you want to be trading a highly liquid market, like the Forex market. But why is it important? The other half of the order gets filled at a lower price, which means the bigger player immediately has a small loss. In order to combat this problem, a bigger player in the market needs to be careful about how he enters the markets.

This problem can be solved in a few different ways:. Knowing this information, you can highlight these areas on your chart and see what price does once these areas are hit. When a market is ranging, liquidity tends to generate on both sides of the range.

If smart money wants to be short, selling at the breakout to the upside of the range can generate enough liquidity to fill the orders. Because people that are short have their stops above the range. You also have people buying above the breakout. This means there is enough buying for a bigger player to sell into. This is how they operate. Building a position is also something smart money does and it can help you to get a trading edge, once you understand how it works.

Just hitting market at this price would create an immediate loss, but splitting the order up in different parts will make sure smart money gets an efficient fill. This is usually done during ranges and at places of high liquidity.

These ranges are called accumulation and distribution ranges. By identifying ranges and analyzing what happens once liquidity gets triggered, you can get a trading edge. The Wyckoff method, but also the concept of liquidity, is the basis of our mechanical trading strategy.

During our 1-on-1 coaching sessions you will learn all about this smart money way of trading. The best way to do this, is to mark out the levels spoken about above, such as:. By marking out these important areas of liquidity and then analyzing what happens once the liquidity at these areas gets triggered, you can get a better understanding of how smart money operates. You can then make up rules to develop an entire strategy around this concept. The next step is to backtest the rules and generate data to confirm a trading edge.

Is the high of a range being taken out, but price quickly and aggressively falls back into the range? Then the buyside liquidity above the range has been triggered and absorbed by smart money, to fill a short order.

Waiting for confirmation is often very important. You want to see clear triggering of the liquidity and then absorption of that liquidity, in order to join him. Our strategy is based around entering after absorption of liquidity. The process of getting the rules and backtesting can take a long time. Focus on proving that the rules are wrong, instead of that the rules are right and make money.

That is where the smart money concept comes in handy. Hence, it helps to comprehend where the retail traders are being manipulated, and where smart money big players are entering or exiting. Indeed, the overall idea of the smart money concept is based on the fact that with an understanding of market psychology as well as being able to deal with large position sizes , the banks, and the financial institutions can manipulate the Forex market.

To clarify, we all know that like all financial markets, the Forex market is based on the universal rule of supply and demand rules. At this point, this law implies that:. Hence, we can conclude that the price movements, either up or down, will affect the market equilibrium.

To explain further, if prices rise, then sellers bears will show up. When prices drop, we will see buyers bulls. In a way, by buying aggressively to remove the floating supply of a currency, they will put the market on that FX in a phase of accumulation.

Thus, smart money traders will be able to move the market whenever they want. For instance, when the Forex market conditions seem favorable. The Forex smart money traders can then increase the price of the underlying currency at some time in the future.

At a certain level, smart money investors will start to make profits by taking advantage of the higher prices and beginning to sell the currency back to the retail traders uninformed ones. In order to have a higher opportunity of achieving profitable trades and taking advantage of smart money, retail traders should align their way of thinking and trading with those institutional investors.

A smart money trading strategy is a simple system that tends to keep traders updated about the general market conditions. It aims also to focus on the relationship between retail and institution investments. As we stated earlier, smart money refers to the capital that banks and financial institutions control. Thus, many investors build their own strategies depending on this concept. So, in order to understand and measure the performance of these capitals compared to the investments of retail traders.

Usually, the market makers such as central banks and financial institutions tend to use their sheer size to impact the market. Yet, this condition does not imply that the forex markets are immoral or that the top players have somehow gained inside knowledge over retail traders.

Commonly, institutional investors take positions throughout every hour of every trading day. In contrast, retail investors trade at the beginning of the trading day, reacting to the morning or overnight news. Nonetheless, we can use the smart money index in two ways:.

The smart money index does not show when to trade in the currencies. Rather, it reveals what a trader can expect from the FX currency in a short period. For instance, if there is an up tendency in an FX pair, the index can warn when the movement will change.

Forex traders can look for oppositeness between the smart money index and the current trend of the market. Consequently, we will be in divergence conditions. Then, it signals a future downtrend.

The image below displays the divergence on the smart money Index. Smart money concepts Forex seems a little bit complicated for many retail traders. For this reason, it is used mostly by big institutions. In effect, by making large positions, smart money traders can control the market and then creates their own profitable circumstances. However, those orders cannot be unseen and retail traders can take advantage of them by trading with smart money.

Usually bigger players such as banks or institutional money, these traders are able to use their sheer size to influence the market. Often at the expense of the retail trading crowd who we know are often crazy enough to try and swim against the tide.

You just have to know how to take advantage of market moves and positions that institutions have set up for themselves, then align your thinking alongside the smart money. As we mentioned above, there is no insider trading going on here and this information is actually readily available for all to see. While releases such as the Commitments of Traders COT report focuses on currency futures, there are actually a number of other sources that traders wanting to identify smart money trades can use.

But forex trading is primarily a game of probabilities and trading a strategy that aligns your thinking with those with the ability to move markets definitely pushes the odds further in your favour. One strategy that allows you to trade in the direction of smart money uses the FXSSI order book analysis indicator to help view how the market is positioned. The premise of this strategy is that you want to be doing the opposite to what the crowd of retail traders are doing, because you know that the smart money will take advantage of their predictable order placement.

The left side of the order book displays all of the pending orders such as take profit and stop loss orders, whereas the right displays trades that are currently open.

By using the indicator to identify what the herd is doing, you can make better informed decisions and ultimately trade against them alongside the smart money. A second strategy that allows you to trade with the smart money, uses another FXSSI indicator called the stop loss clusters indicator to view areas where stop orders have pooled.

All a cluster really implies is that there are a significant number of stop loss orders just waiting to be filled. Liquidity required to get a larger position filled, without incurring too much price slippage as they enter. What we see here is a smart money position being filled at liquidity identified by the indicator, all the way through to the subsequent closing of the position at demand.

December 29, Smart Money Trading - Key Concepts and Strategies Sentiment Strategy 2. Related Articles. What's Next? Learn basic Sentiment Strategy Setups.

But why is it important? This means there is enough buying for a bigger player to sell into. While releases such as the Commitments of Traders COT report focuses on currency futures, there are actually a number of other sources that traders wanting to identify smart money trades can use. How to find liquidity in the forex market? Then the buyside liquidity above the range has been triggered and absorbed by smart money, to fill a short order. Smart money is very popular these days.

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