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Smart Money Concepts for Forex ( PDF )
Introduction:
Smart money concepts in Forex markets represent an impressive
approach that is built on the manipulation of the Forex markets to
engineer liquidity. In general, this concept shows the ability of
important financial institutions to impact price movements and
create new forex trends. Indeed, smart money concepts in Forex can
provide market actors, either retail traders or big institutions with
multiple information about the overall market condition. So, as a new
trading method, it helps them to understand the total movement of the
Forex market.
Table of contents:
What is smart money concept in forex?
How does the smart money concept work?
How to trade with Smart Money?
Smart money trading strategy
I.
What is smart money concept in forex?
Smart money concepts Forex defines a general approach when trading
currencies. In fact, to understand the main idea behind this concept we
should first learn about “Smart Money”.
Smart Money
Actually, smart money doesn’t consider a trader’s intelligence as more
as it refers to its impact on the market. To further explain, smart
money refers to a group of actors in the Forex market that has the
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ability and the power to move the price market. Those important
players are mainly “Banks” and “Institutions” with a huge force of
money. These smart money traders can easily influence volumes and
prices in the live markets.
In fact, this category of traders includes Central Banks, Hedge Funds,
Big Interbank, and global companies. That has enough volumes and
liquidity to manipulate the market.
Nevertheless, banks and big institutions trade forex currency with
higher volumes than retail traders. They are the players who are
consistently correct about the market. That is why market actors
describe them as “market makers”.
In other words, we can consider smart money as the amount of money
invested by Banks levels and institutions with a great knowledge of the
Forex market, which retail traders cannot approach.
So by returning to our main subject ” smart money concepts in Forex”,
we can tell that in every market we can find retail traders as well as
institutions. Thus, Forex retail’s mindset is the same across all currency
pairs. 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.
II.
How does the smart money concept work?
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:
 Rule of demand: the higher the price of an FX currency, the
fewer the demand. In contrast, the lower the price of an FX
currency pair, the higher the demand.
 Rule of supply: the higher the price of an FX currency, the higher
the supply. Conversely, the lower the price of an FX currency
pair, the lower the supply.
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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).
III. How to trade with Smart Money?
By applying the same logic to our main approach “smart money
concepts Forex”, we will understand that the market makers (big
players) try to create similar conditions. 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.
IV.
Smart money trading strategy
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. We can use the “smart money index”.
Usually, the market makers such as central banks and financial
institutions tend to use their sheer size to impact the market. Yet, this
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condition does not imply that the forex markets are immoral or that
the top players have somehow gained inside knowledge over retail
traders.
 Smart Money Index
In fact, we can use the smart money index to evaluate the performance
of institutions investments in the Forex market relative to the money
invested by retail traders (known as “dumb money”). 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:
 Confirmation of currency pair trend
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.
 Variations in the SMI and the market tendency
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. In this regard, if a currency pair’s price moves
down while the smart money index goes up, it usually signals an
upcoming upward tendency. Conversely, if the FX currency pair’s price
heads up and the SMI moves is dropping. Then, it signals a future
downtrend. The image below displays the divergence on the smart
money Index.
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Conclusion:
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. This means you have to buy if they
are buying and shorten your position if they are selling.
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