Amalgam of SMC, SnD and Trading Psychology
“The magna carta of profitability”
These notes were authored by Mlamuli Makhanda widely known as “king sniper” from my
understanding of the smart money concepts and the supply and demand approach to trading
which are two methods I find to be very profitable when used in conjunction and traded on
any moving markets, even though the strike rate of this method of trading is significantly
high I still advice you to follow a strict risk management when trading because loses are a
part of trading and essentially a cost of doing business in the trading industry in other words
they are the tool we use to avail ourselves for the winning trades.
“As I began writing down these motes in my journal book, I was asking myself multiple
questions with an aim of creating a very informative yet easy to understand guide to trading
that can be used by any trader who seeks to be consistently profitable in the financial markets
from a beginner to advance…during that process of asking and answering multiple questions
it finally dawned on me that for every trader to be consistently profitable in the financial
markets he/she needs to know, understand and apply 5 most important key factors of trading
which are:
1.
2.
3.
4.
5.
Knowing the favourable direction in the market.
Knowing when to enter the market.
Knowing when to exit the market.
How to manage a trading account.
Understanding the 5 fundamental truths about trading the financial markets.
Everything that will be laid down in the following pages whether technical or psychological
is meant to help the reader get a better grasp of any of the 5 important key factors to become
a consistently profitable trader, with that being said, PLEASE DO NOT SELL, COPY OR
SPREAD THESE NOTES.
PLEASE DO NOT SELL, COPY OR SPREAD THESE NOTES.
Diagram of contents
Market structure
Market structure is the tool that is used to deduce direction in the market, and it can be
broken down to 3 phases which are drop phase, rally phase or ranging phase. The drop and
rally phase are the phases where the market is trending. A trending market is a market that is
creating new swing points (highs and lows) by violating the previous swing points depending
on the direction of the trend.
Always identify the correct market structure before you buy/sell. Start reading your market
structure from a higher timeframe then go to lower timeframe for refined entries
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Look for sell trades during drop phase.
Look for buy trades during rally phase.
Drop phase
The drop phase or down trending market is the one that is creating lower lows (LL) and
Lower highs (LH) by breaching the lows and keeping the highs protected.
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Rally phase
The rally phase or up trending market is the one that is creating higher highs (HH) and higher
lows (HL) by breaking the highs and keeping the lows protected.
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Ranging phase
A market in a ranging phase is a market that is moving up and down between swing points
the market is creating almost equal highs and equal lows.
BOS (break of structure)
Break of structure, is the break of a higher high (HH) in an uptrend or the break of a lower
low (LL) in a downtrend thus BOS is a continuation signal, the break of structure is
confirmed by the candle body close.
SMS (shift in market structure)
Shift in market structure, is when the price fails to make a higher high (HH) in an uptrend or
when the price fails to make a lower low (LL) in a downtrend, price will then form a CHOCH
to confirm a change in direction of the trend and start making swing points in the new
direction.
CHOCH (change of character)
Change of character is the break of a higher low (HL) in an uptrend or the break of a lower
high (LH) in a downtrend, thus CHOCH is a reversal signal.
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Liquidity (money)
Trading is a zero-sum game, meaning when someone is making money someone else is
losing money. With this understanding it must be understood that the guy who is going to be
profitable in the long term is the one with access to large amounts of funds and these are your
dominant market players sometimes called the market makers who induces liquidity on the
market to come back and collect it.
In simple terms liquidity is where the orders lay in the market, these orders could be stop
orders or limit orders and the market makers will reach for these orders, collecting the
liquidity before going in their desired direction. Liquidity is identified based on the
understanding of where are other traders getting caught on the wrong direction.
Liquidity – is the fuel needed for the price to move from one place to another, so without
liquidity being induced into the market by the retail volume there won’t be no opportunities
for institutional traders to trade. You either see the liquidity or you become the liquidity.
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Forms of liquidity
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Retail support and resistance levels
Equal swing points
Trendlines
Imbalance
In normal markets price is delivered efficiently meaning all the wicks/shadows are touching
and there is no big gaps or sudden big movements. Imbalance is when the price moves
aggressively in one direction with full body big candles without coming back to rebalance the
price. The price significantly shoots in one direction leaving inefficiency gaps behind.
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Imbalance represents the one sidedness of orders being executed in the market, because in
normal conditions every buy order must be met with a sell order and if this is mot the case the
price will drop significantly until it reaches a level where there are enough buyers to match
the sellers then the price will start moving in a balanced manner.
With this understanding it has to be seem that it can only ve people with same motives and
large amounts of funds (market makers) who can cause imbalance in the marketplace.
The price will always come back to correct imbalance and fill the inefficiency gaps in price
until the 50% of the last gap.
Market structure, liquidity and imbalance
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The financial markets are driven by liquidity and imbalance.
The market is either moving to create liquidity, collect liquidity or correct price
imbalance.
Market structure is how the market moves om the other hand liquidity and imbalance
is why the market moves.
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Base
Base is where the market makers hide their pending orders while waiting to do a continuation
or reversal entry when the price returns to the base.
Knowing if a base is strong or weak
• A strong base must break/engulf something (a structure or opposite base)
• A strong base must create some form of imbalance.
• If the base has taken out an opposite base that is a very strong base and it has a high
probability to hold the price, shall it return to it.
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Continuous base
Reversal base
Characteristics of a significant base (SGB) and significant demand breach (SDB)
The base that breached a significant demand zone is called a significant base.
The base that breached a significant supply zone is called a significant base.
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The price is coming from a RBR and has broken an old high creating a higher high
Price them retraces to the demand zone in RBR
The price reacts to the demand zone by rejection
Price them forms the SDB by breaching the demand zone
The base that was formed before SDB is the SGB, and it houses the true order-block
Price comes back and rejects the flip zone (significant demand turned supply) before
breaking the flip-zone, collecting liquidity as it goes back to the SGB
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POI- point of interest (order-block)
Our point of interest is the order block that we are going to find inside the SGB
What is an order-block?
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An order-block is the last up move before the significant move to the downside or the
last down move before the significant move to the upside.
An order-block is the point of origin of the move that caused the BOS
An order-block is the point of origin of the move that caused SDB
An order-block is what creates imbalance.
Types of order blocks
1. 2nd candle significantly engulfs the 1st candle
2. Doji order-blocks
3. First 2 candles are both bullish or bearish but the 3rd candle significantly engulfs the
first 2 candles:
4. Equal candles order-block
5. Hidden base order block. This is called a hidden base because in a multi timeframe
analysis there will be a hidden order-block within the wicks.
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Flip-zone (manipulation)
Flip zone is when the supply becomes a demand or demand becomes a supply at the same
area and it can be seen by the price reacting by reaction to it.
This is essentially a zone of manipulation to catch retail traders who are impatient.
No trade should be taken below the flip zone.
Pattern of approach
This part of supply and demand trading approach is single-handedly the most important part
of this approach. There are certain characteristics that the price must exhibit before reaching
our order block to reduce the risk of the trade. Without a pattern of approach there is NO
TRADE.
Types of PA
1.
2.
3.
4.
5.
6.
Flip zone
Compression/ accumulation
3 drives
SR (support turned resistance)
LC (liquidity collection) & FOZ (fake out zone)
Diamond
QML Quasimodo level
QML gets its name from a cartoon character Quasimodo Hunchbacked
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The price creates a High(H)
The price creates a Low(L)
From the low the price will move to create a Higher high (HH) breaking the previous high
then come down to create a lower low (LL) breaking the low.
The Quasimodo level is along the first high that was created and the zone between the QML
and the Higher high is called the golden zone and it is where you are going to look for an
order block. An entry may also be taken at the QML, and the stop goes above the Higher
high.
QMTR (Quasimodo tak respect)
A QMTR is a failed Quasimodo as the price failed to drop and respect our order block
Entry is taken when the prices retraces to the failed order block along the QML.
Flag limit
The price creates a DBR in this case our base is a flag with a multiple rejections, price then
breaks out of the base and take out an opposing supply zone to create a new HH wait for the
price to come back in an accumulation PA, then take an entry at the order block inside the
base.
Failed accumulation
After accumulating price fails to go back where the accumulation commenced and close it,
but it creates an up move before dropping down significantly. Sell the market when it reaches
the Order block.
liquidity sweep(purge and revert)
liquidity sweep is a quick stop hunt move that the market makers make before going in their
desired direction, the area where stops were collected acts as a supply or demand zone having
an order block around this zone is a bonus.
Inefficiency gap
In a strong impulse move with large candles the inefficiency gap is the space between the
wicks, inefficiency gaps may be identified on a 1min timeframe inside the order block if the
gaps are presents it signifies that the order block is strong.
Failed test (FT) – is when the price fails to reach the demand or supply zone.
Mitigation – in a trading range mitigation is when the price returns to the point of origin, of
the impulse to mitigate the sell orders in a bullish impulse or mitigate the buy orders in a
bearish impulse. This takes place because we understand that when the institutions are buying
in a trading range, they are also actively selling difference being that in an accumulation
trading range the buy orders outnumber the sell orders and the same goes for the distribution
trading range the sell orders outnumber the buy orders.
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Everything written so far answers the first 3 questions about getting a favourable direction in
the market and knowing when to enter the market and exit it for a profit or a loss.
Unfortunately, that alone does not make up a great and consistently profitable trader.
4. How to manage a trading account successfully?
Managing a trading account successfully comes down to understanding that trading is a
probabilities game, and it is all about odds and having a system or approach that tilts the odds
towards your favour. Already an approach has been laid down in the previous pages what is
left is a risk management plan and that is entirely up to everyone since everyone’s risk
appetite is different and another thing the size of everyone’s account is different.
DEFINE YOUR RISK MANAGEMENT PLAN AND STICK TO IT
The five fundamental truths about trading.
These are the five undisputed truths about trading, and they must be accepted and
incorporated by every trader to their belief system to create consistency in their trading
careers.
1. Anything can happen in the market.
2. You do not need to know what is going to happen next to make money (we only make
ourselves available for whatever out come the market is going to give)
3. There is a random distribution between wins and loses for every strategy.
4. An edge(strategy) is mothing but an indication of a higher probability of one thing
happening over another.
5. Every moment in the market is unique.
“This is the end of the notes and the trading guide I
wish you a very successful trading career”
- Mlamuli ‘king Sniper’ Makhanda
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