SMART MONEY
CONCEPTS
A full guide to understanding Smart Money
Concepts.
SMART MONEY
INTRODUCTION | PREFACE
Hey Onyx members, It's Nick here, thanks for taking the time to learn with my company, education in the financial markets is hugely important and for you guys
and girls to be here investing your own money into learning shows me you are serious about it, which is why I take the time to do extra things like write a full PDF
on my understanding of Smart Money Concepts.
Throughout this PDF/Guide I can only really break down what I know and what I understand based on my experience but I have spent over 200 +hours studying
smart money price action and have spent at least another 100+ hours studying some of the best traders in the world who use Smart Money Concepts/Supply &
Demand.
In this PDF I reference different teachings and have simplified a lot of the teachings from people I owe a lot to in terms of education myself.
They go as follows.
1. Sam Seiden Supply & Demand Principles
2. ICT (Inner Circle Trader)
3. Tom Dante
4. Richard DeMille Wyckoff
5. Mark Douglass
And all the rest of the people along my own personal journey!
I haven't perfected trading, and I never will, even writing this I find myself educating myself and re-iterating my learnings of fundamental principles, which is part of
the reason why I do this, to teach is to learn twice!
CONTENTS
Who is Smart Money/Composite Man
Supply & Demand Principles
Liquidity
Orders
Orderblocks
Imbalance
Strength Of Move
To be added:
Refinement
Risk Entry
Lower Risk Entry
Optimising Your Own Rules
COMPOSITE MAN/SMART MONEY
Think of composite man/smart money as an evil manipulator sitting behind the scenes controlling markets by pulling levers and pushing buttons. Their goal is to
perpetually outwit you and move the markets to the average retail traders disadvantage.
95% Of liquidity in these market are institutional order flow, only 5% of trading volume is made up of retail trading volume, so why are so many people taught to
buy breakouts and sell at already extremely discounted levels?
Because this is the goal of smart money, to have liquidity created from ''dumb'' money acting as a transfer of wealth or creation of liquidity for SMART MONEY to
play their games, and the only game they play is PROFIT.
Now, when you think of smart money, don't just think of really evil people behind computers. Smart Money is billions of dollars worth of technology, algorithims
and software that understands where buy/sell liquidity AKA orders in the market lay.
Remember, every buy order, sell order, stop loss or other order type is essentially just sitting liquidity waiting to be involved or exited from the market.
So trading against them is no option, we need to learn to trade like them as much as possible.
This is why the notion of discounted/premium prices makes so much sense when trading, and is probably the most important part of trading smart money
concepts.
The goal of this PDF is to portay my understanding of Smart Money, which btw is no where near perfect, but from the extensive 200+ hours of research and
trial/error I have gone through, hopefully this can help you understand that the only way to trade effectively in these markets is by avoiding the ''pack'' and doing
essentially the opposite of what 90% of retail traders do.
Why? Because 90% of retail traders L O S E - M O N E Y.
COMPOSITE MAN/SMART MONEY
Smart Money is there to fool you to buying positions that he has already accumulated
Smart Money will tempt you to sell at the worst possible time
Smart Money leaves subtle evidence of the strategy for those who understand them
In closing, smart moneys game is to fool the greater % of the market through emotions.
The emotions that retail traders get fooled by are as follows - I will provide some examples.
1. They buy break outs due to greed and fear of missing out
2. They sell when the market is bleeding because of the fear they will miss out on the bloodshed, only to see the market stop them out as soon as they enter
3. They pray on over activity of retail traders and routine of stop losses above even highs and even lows to create liquidity for themselves to hunt and fill
positions.
Smart money refers to the smartest players with a huge force of money who can cause an impact in the market and move the price. They are also described as
market makers. These smart money traders have enough volumes and money, to cause a change in the live market. Central Banks, Hedge Funds, big Interbank;
Bank of America, Barclays, Goldman Sachs, HSBC, Citigroup, UBS, major insurance, and global companies are some of the examples behind smart money. They
have enormous influence and are always powerful in the financial market. reference - (Forexlens, 2020).
SUPPLY & DEMAND
Supply and demand are the most primary concepts in the field of economics. It applies everywhere, and supply and demand in the vegetable market are not
different to what occurs in the financial markets daily, Supply & Demand is the connection between sellers and buyers. In simple words, we can say that supply is
the accessible amount/stock and demand is the amount wanted. (Warren Venketas, 2019). Therefore, the supply zone is often used for areas of selling interest,
and the demand zone is used for buying.
The law of demand holds that the demand level for a product or a resource will decline as its price rises, and rise as the price drops. Conversely, the law of supply
says higher prices boost supply of an economic good while lower ones tend to diminish it.
If we think about this in trading, this is why we only buy discounted prices and sell premium prices. When we are trading we need to be positioned correctly in the
market and we will cover this further in Entries.
When buying discounts, we are immediately increasing our chances of being involved with higher levels of interest and larger demand zones, when we sell
premium prices we are immediately increasing our chances of being involved in larger areas of supply zones/selling interest.
Most trading strategies will teach you to buy breakouts, when you think about that logically.. Why would you buy something for a premium price and expect to sell
it back for more of a premium on the same day? Doesn't make sense right?
Supply & Demand is the key to trading, literally.
Smart Money doesn't work without understanding supply & demand deeply.
SUPPLY & DEMAND
it is important to understand how markets work and why prices move. Price movement in any free market is a function of an ongoing supply and demand
relationship within that market. Opportunity exists when this simple and straight forward relationship is out of balance. Put quite simply, a market is made up of
three components: buyers, sellers and the asset which is being bought/sold.
A market is always in one of three states: (Reference - Sam Seiden Supply & Demand Principles)
1. It can be in a state where demand exceeds supply which means there is competition to buy and that leads to higher prices.
2. It can be in a state where supply exceeds demand which means there is competition to sell and this leads to declining prices.
3. It can be in a state of equilibrium. At equilibrium, there is no competition to buy or sell because the market is at a price where everyone can buy or sell as
much as they want. However, as the market moves away from equilibrium, competition increases which forces price back to equilibrium. In other words,
competition eliminates itself by forcing market prices back to equilibrium. At equilibrium, there is little to no trading opportunity.
SUPPLY & DEMAND
The picture above is how a chart would look if you removed time from the equation. You would see at each price level, how many willing and able buyers
and sellers are present. We can certainly derive the same information when viewing time based charts. This is done by identifying supply and demand levels
as I did with the BTC chart. Not every cluster of trading is a supply or demand level and not every high or low is a demand/supply orderblock. This is all
based on an objective set of rules based on the laws of supply and demand and having a strategy that helps you identify these levels properly.
As you can see from the image of the buyers and sellers on the right in the slide above, it essentially shows the logic of supply and demand in the market, the
lower the prices go, the more demand for a certain asset, the higher a price goes, the less demand for a certain asset.
This is why markets never move straight up in one direction.
Because of return risk.
Risk is higher when you are buying premiums or selling extreme discounts, the returns diminish and ultimately it goes against the law of supply and demand.
Finding the novice traders or the ''trapped traders'' as I talk about in the course.
The way to do this is to focus on what the masses are doing wrong. Novice traders consistently make two mistakes.
First, they buy after a period of buying and sell after a period of selling.
Second, they buy into areas of resistance (supply) and sell into areas of support (demand). The laws of supply and demand say that they will consistently lose
doing that, here is an image on the next slide showing an example of this.
SUPPLY & DEMAND
In this picture below, this is the mistakes of a novice trader or a trapped trader, the term trapped means they have entered the market in the wrong position and
are essentially stuck at premium prices with no game plan. A trader with true understanding of market structure and supply and demand would know this is an
area of supply and an entry to go short. The final bullish candle before the move away is where a large percentage of novice/retail traders are buying and hoping
to catch breakouts or momentum.
SUPPLY & DEMAND
Again, with the example below. As prices get lower, supply and demand laws tells us that demand increases. So the novice selling occurs due to being positioned
incorrectly in the market, they see the ''support'' level break and see momentum bearish candles causing them to make incorrect trading decisions, the novice
trader is selling extreme discounts and selling into an area of Demand, where the smart money are looking to use the selling liquidity to fill buy orders in the
market.
LIQUIDITY
Market liquidity, which is generally seen as a measure of the ability of market participants (traders) to undertake buy/sell transactions without triggering large
changes in the assets price.
A market order is a trade order to either buy or sell a security immediately at the prevailing market price. An investor who submits a market order is demanding
liquidity from the market. That is, she/he is wishing to trade the security as quickly as possible and at the best price possible. In contrast, a limit order is an order to
trade if the security reaches a certain price (pending order sitting on the order book). An investor who places a limit order is supplying liquidity to the market as
their order waits in the order book to be matched with a market order.
Now, understanding liquidity is super important as we discussed earlier, smart money and the ''composite man'' want to hunt liquidity to fill their large orders,
remember, every seller needs a buyer and visa versa.
If I want you to take anything away from this, its the below.
Market Buy Orders create instant buying liquidity at the most available market price.
Market Sell Orders create instant selling liquidity at the most available market price.
Limit Buy Orders create pending buying liquidity at the chosen order price.
Limit Sell Orders create pending selling liquidity at the chosen order price.
Stop Losses are simply limit orders depending on which direction you are trading
Remember, with stop losses, when you are long and have a stop loss on, that is essentially a sell order/selling liquidity for you to sell back that position when it
reaches the stop loss price.
Stop losses when you are short are providing pending buy liquidity above your entry, to buy back if the price goes against you and exit the position.
LIQUIDITY/ORDERS
This image depicts exactly how liquidity through orders in the markets work, think about when a novice trader buys support and they place their stop loss (sell
order) below support, the market drops and because there are stacks of the same orders, there is competition to sell which causes a domino effect of selling
pressure, visa versa for the same way. Smart Money use this knowledge to hunt liquidity and as we can see in this chart, they have almost cleared all liquidity
orders in the market to fill their own orders.
LIQUIDITY
Have you ever traded retail methods and had your BIAS 100% on point, but you got stopped out by a wick and the price went exactly where you wanted it to go
right after collecting your stops.
Yep, this is liquidity hunting, known as a stop grab or a liquidity grab.
This happens over and over again and are the main reasons why common strategies such as standard support and resistance, trendlines, chart patterns (double
tops, double bottoms, bear flags, bull flags etc rarely work. If 90% of retail traders are utilising these methods, then of course institutional algorithms are going to
be programmed to purge stop losses surrounding these areas.
So when we trade Smart Money, we aren't trading against the institutions, we are placing ourselves in the best possible pisition to follow their market footprint.
We know that for every buy needs a seller and for every seller needs a buyer, so liquidity and orderflow in the market just serves as fuel for these insitutions to
make more profit, fill larger positions and cause more volatility within these markets.
If there is liquidity forming before an AOI (Area Of Interest) or (Orderblock) Or S&D (Supply & Demand level, this will tell us that we are at an area where price can
react heavily from based on liquidity.
I will place a few images below of standard retail trading methods and where their liquidity would be laying before a potential AOI (Area Of Interest) within our
strategy, and you will start to see how it all ties in to the larger game at play.
Stop thinking of the market as lines and rectangles, open your mind to think '' Where are the most novice traders placing their stop losses or their orders'' and how
can I trade against this?
This is how to become a profitable sniper-like trader.
TREND LINE LIQUIDITY
STOPS
STOPS
STOPS
INE
L
D
N
TRE
AREA OF INTEREST
TY
I
D
I
LIQU
EQUAL LOWS LIQUIDITY
STOPS
EQUAL LOWS
AREA OF INTEREST
EQUAL HIGHS LIQUIDITY
AREA OF INTEREST
EQUAL HIGHS
TLL
SUPPORT & RESISTANCE LIQUIDITY
RESISTANCE
SUPPORT
AREA OF INTEREST
LIQUIDITY BEFORE AOI
As you can see, our orderblocks/breakers or areas of interest are always higher probability when there is clear liqudity liquidated aka stops ran or liquidity
grabbed, you really want this occuring before you are involved as it gives you a risk defined entry and hugely increases probability (this can occur on any time
frame) When there hasn't been any trapped or hurt traders, it probably means the move to cause that hasn't happened yet and you aren't at a high probability
level to take a trade, you want to see liquidity taken as this means there are positions being filled (aka smart money being involved)
RISK DEFINED STOPS
BREAKER BLOCK (SUPPLY)
ENTRY
EQ HIGHS
RESISTANCE
SUPPORT
TARGET @ LOWS
LIQUIDITY BEFORE AOI
Go back and look at your best orderblock trades, I can almost guarantee there would have been a tonne of retail liquidity taken out before the impulse move off
your entry level, as we can see in this example (which is an actual trade I took and shared within the group) we can see the equal highs to the left are broken, the
trendline liquidity is taken causing retail sellers to stack shorts and also get stopped out of their previously long positions, we are waiting patiently at our area of
interest with risk defined entries, profit target at previous highs. There are tonnes of trapped traders in this play here, and this is what causes high probability set
ups, understanding liquidity is key.
TAKE PROFIT @ PREVIOUS HIGHS
RESISTANCE/ EQUAL HIGHS $ $
AREA OF INTEREST
ND
E
TR
Y
IT
D
I
QU
I
L
$
ENTRY
$
RISK DEFINED STOP LOSS
LIQUIDITY BEFORE AOI
This is a 15 minute time frame, the higher time frame bias is bullish, hence why we are looking at demand areas of interest, but it goes to show, that the demand
area being below equal lows of support causes high probability trades, understanding where retail stops and trading activity occurs will happen causes you to
understand exactly where you want to be involved - they trade support/resistance and trendlines, they also place stops below support and above resistance.
EQH TARGET $ $ $
EQH
IMBALANCE
EQL / SUPPORT $$
EQH
AREA OF INTEREST
REFINED OB
IMBALANCE/LIQUIDITY VOID
An imbalance is literally the key (I believe) to a high probabilty trading set up, order-blocks aren't strong unless there is a liquidity imbalance or ''void'' these are
also known as the following, you may see the following online, they are just other words for imbalance, the reason I like Imbalance is because thats literally what it
is, an imbalance between supply and demand, when supply and demand are equal markets don't move and simply range, when an imbalance of S&D occur, we
see huge volume movements that usually break market structure, this is the first footprint we want to see to identify smart money.
Imbalance
Void
Liquidity Void (LV)
FVG (Fair Value Gap)
Inefficiency
An imbalance occurs when the order block creates such impulsive volume in the market that it throws off the equilibrium between buyers and sellers forming a
gap or liquidity inefficiency, these gaps act as a magnet for price to return to in order to correct the supply and demand balance in the market.
Always remember, too much demand doesn't work because there's minimal selling liquidity to fill these buy orders, too much supply doesn't work because there
will be minimal buying liquidity to fill these sell orders, the market needs to always return to equilibriums.
Identifying clean imbalances in the market is what you need to train the eye on, an order block should not be identified unless there is a strong imbalance that
breaks market structure or a previous high/low.
Examples on the next page will help you understand how easy it is to identify high probability order blocks.
IMBALANCE/LIQUIDITY VOID
IMPULSE MOVE
STRUCTURE
IMBALANCE/VOID/FVG
FILLS IMBALANCE
ORDERBLOCK (DOWN CANDLE BEFORE IMPULSE/IMBALANCE THAT BROKE STRUCTURE)
RETURN TO ORIGIN
IMBALANCE/LIQUIDITY VOID
IMPULSE MOVE
STRUCTURE
FILLS IMBALANCE
IMBALANCE/VOID/FVG
DEMAND ORDERBLOCK
RETURN TO ORIGIN
IMBALANCE/LIQUIDITY VOID
if you seriously focus on imbalance and the initial impulse move breaking structure with strength, this will present you with a consistently high probability strategy,
smart money concepts are only as good as the set ups you allow yourself to take, if you are drawing every orderblock, its because you aren't understanding the
thesis behind the strategy.
This guide should realign you with understanding exactly what you need to see step by step before trading these order-blocks, an orderblock is simply the last
up/down candle before this imbalance/void occurs in the market, the second rule based tick we need is the break of structure, as you can see in these examples,
the impulsive price movement breaks structure to the left, we then are waiting for a return to the origin.
Remember the rules, discounted prices for longs, premium prices for shorts.
An example is this image below - you may ask, why not take the most recent orderblock, because there was a break of structure and imbalance right, yes but it's
not discounted enough, thats why I have introduced the fib retracement confluence with our strategy, it helps you keep in line with optimal trade entries.
ABOVE 50% FIB
ORDERBLOCK
61% DISCOUNTED
STRENGTH OF MOVE
Strength of the move at your AOI or order-block is a probability enhancer and will help you understand quickly if you have the right area where smart money are
involved, this concept I first learnt from Sam Seiden, one of the earlier supply & demand traders.
How did prices leave the level: strong fashion, or a more gradual move away from the level. Gives clues to supply and demand imbalance at the level. Strongest
move/turn in price occur where supply and demand is most out of balance. So our quest is to look for price levels where supply and demand is most out of
balance. The biggest clue in how in balance or out of balance prices are at a level, is how quickly they leave. The more quickly they move, the more out of balance
they are...
This isn't to say order-blocks that don't move directly off the level in an explosive fashion aren't worth staying in, but it gives you an idea of how imbalanced pricing
is and if you are going to halve risk, go to break even quicker or simply cancel the trade due to losing confidence.
This concept also ties into the tests of a demand/supply order-block, I always want to be taking fresh levels, meaning we want to trade the first return to origin,
strength will always diminish with the more tests of a level as the liquidity is thinning, the longer prices stay at a level means the more equilibrium (supply and
demand balance) is occuring.
Remember, we want to trade at imbalances, this is where we make money.
On the next few pages, I will show you completely sound order-blocks that had different strength of moves, and how they played out.
STRENGTH OF MOVE - A RATING
This is an A rating strength of move. The only downside to A side strength of moves, is they front run the level, meaning it won't come too deep into the order
block, so this is why I trade with rule based execution (50% of the orderblock) but this goes to show a huge imbalance, remember the trend line I am drawing is to
simply show you whats happening with liquidity, stops are getting ran, trapping novice traders then exploding to new highs.
STUCTURE
ORDERBLOCK
$$
$
TY
DI
I
U
IQ
L
E
IN
L
ND
E
TR
STRENGTH OF MOVE - B RATING
This order-block example here is a perfect set up, you have equal lows getting stopped out with the impulsive move that broke structure, we have a clean up
candle with some fullness meaning there was trapped longs in that order block before going underwater (negative on their positions) so yes, this set up is
beautiful, but as we can see the strength of move off the order-block wasn't exactly explosive, I would rate this a mid level strength reaction, it's definitely not the
strongest but I would not be changing stops or changing set ups with a reaction like this.
ORDERBLOCK
EQL / SUPPORT $$
LOWS TARGET $$
STRENGTH OF MOVE - C RATING
This order-block is beautifully set up, but as we can see, the strength of move isn't, just because there is an orderblock thats fresh and really strong in price
character, doesn't mean smart money have to stop there. They don't play fair, this is why the strength of move will help you get out of this trade before you even
go into your stops. As soon as I see small ranging activity (higher highs higher lows) within an order block, I rate this a C and simply close the trade for a minimal
loss.
EQUAL HIGHS $$
ORDERBLOCK
STRENGTH OF MOVE -C
RESISTANCE $$
SUPPORT $$