02
table of contents
Introduction
Liquidity
Order Blocks (OB)
Break of Structure (BOS)
Change of Character (CHoCH)
Breaker Blocks
Fair Value Gaps (FVG)
Fibonacci Retracement
Elliott Wave Cycle
Example trade walkthrough (Sniper Entries)
News
Conclusion
Introduction
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95% of retail traders lose money. Why? Banks and institutions
exploit retail traders who use traditional concepts like support and
resistance, trendlines, and indicators. The real key is understanding
how the banks and market makers are trading, since these are the
institutions which drive the market, not regular traders like you and
I. These institutions are known as ‘smart money’ and they trade on
concepts like Liquidity, Order Blocks, Fair Value Gaps etc. which are
very different to common retail strategies.
This guide will teach you how to trade with the smart money,
explaining the most profitable setups and entries to look for. It is
written in a very clear and easy to understand format with
supporting diagrams and examples.
Some of the concepts taught may seem too good to be true and
almost like a cheat code to trading. Despite these strategies being
profitable, it is important to remember, you cannot win every trade
and you must develop a strategy which you back-test thoroughly.
You cannot catch every move; it is important to wait for the right
trade opportunities and not chase a trade or have FOMO. The market
will always be there for the next trade.
Traditional retail trading strategies like support and resistance, use
of indicators, trendlines, double tops and bottoms etc. may still work
for some traders and will still be important to identify liquidity levels.
However, they are not covered in depth in this guide to avoid the trap
of following what the majority of traders are still doing that banks
capitalise on.
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Before we get into the ‘smart money concepts’ it is important to
understand a few basic principles to ensure you become a
consistently profitable trader:
Always have appropriate risk management: I would
suggest not risking more than 2% of your account per trade
especially considering the strategies we are about to cover
offer a large reward to risk ratio.
Always try to achieve a good reward to risk ratio: if the
setup doesn’t have a good enough reward to risk ratio,
then don’t trade it. I recommend at least a 1.5:1 reward to
risk ratio per trade using the strategies listed below. Use
Trading View to perform your analysis and calculate the
reward to risk ratio.
Try to have multiple take profit targets to maximise
your gains. These should be at different ‘liquidity
levels’ (covered later). You should partially take profits at
each liquidity level you are targeting.
Use top-down analysis: Always look at the higher
time frames (HTF) first (daily, weekly, monthly) since this
is what the banks trade on, then go down to the lower
time frames (LTF: 4h, 1h, 15m, 5m, 1m) to refine your trades
and get those sniper entries.
Look for high probability setups to increase your win
rate. These are setups where there may be multiple
signals from the different strategies mentioned that
compound to give a trade that is likely to win.
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It’s ok to lose trades. It’s all about reacting to the market not
trying to predict it. When you identify the setup, place the
appropriate trade, and don’t try to chase losses. Stick to your
strategy.
Note:
I suggest using Trading View (free)
to perform
your
analysis.
It
has
many
annotation tools to help you
analyse all your charts easily.
Please join our Discord community
through the link on our TikTok or Instagram
so we can share and discuss potential
trades and answer any questions about
this guide.
Liquidity
This is a very important concept to understand when trading with
these ‘smart money’ setups. Liquidity gives us an indication of
where price will run through with strong impulsive candles. It allows
us to anticipate large moves into these areas and set take profit
targets at these levels.
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What is liquidity?
The strict definition of liquidity is the ability to buy or sell an asset
quickly and easily without affecting its market price.
In simpler, more practical terms it is where there is likely to be a
large amount of buy or sell orders in the market e.g., where retail
traders have a lot of stop losses placed.
For example, if price is in a range, we expect retail traders to place
sells at the top of the range and buys and the bottom of the range.
Their stop losses will be just outside the range as shown below
which creates liquidity.
What most retail traders do:
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Banks and institutions have billions of very large orders that they
need to place and so they look for pockets of liquidity to fill these
orders. We can use this information to understand where the banks
will try to move the market next…
When there are areas of liquidity, price will move quickly in and out
of these areas to fill their orders meaning price will not stay there
very long. This is represented by large candle wicks and bodies
around these liquidity levels.
There is liquidity all over the chart on any time frame:
Notice how when liquidity gets taken out (when price goes past the
liquidity level), the move has a lot of volume and large candlesticks.
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Remember: When we look for liquidity, it is always above or below
the candlestick wicks, not the body.
Here are some good identifiers of liquidity:
Just above equal highs
Just below equal lows
Recent highs or lows in a trend
Daily/Weekly highs and lows
Just above and below areas of support and resistance (when
price is in a range)
The more equal highs or lows at the same level, the more liquidity
lies just above or below for banks to sweep.
Liquidity Sweep
A liquidity sweep is where banks quickly take out the stop losses set
by retail traders where the liquidity lies, and then they move the
market very impulsively in the opposite direction. We can think of
liquidity sweeps as fuel for the next move. This is seen all over the
markets every day.
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To capitalise on a move like this, we wait for the sell-side liquidity to
be swept and once we see the first impulsive up candle, we know
there will be a liquidity sweep of the buy-side liquidity straight after.
We can take a buy position targeting above the buy-side liquidity.
However, this setup must be in confluence with a few other
strategies (order block, FVG, breaker block etc.) mentioned further
on.
We can also use liquidity levels to set our take profit targets:
For example, if we placed this buy trade, our take profit targets
would be placed at these 3 liquidity levels.
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Order Blocks
Understanding the key price levels at which banks prefer to buy and
sell is crucial for comprehending institutional order flow, and this is
where Order Blocks come into play.
What is an Order Block?
An Order Block is a price area where banks have placed large orders,
either to buy or sell a particular asset and their sheer size often
causes large swings in the market. If we are able to identify these
areas, we can catch the large swings and win high reward trades.
Banks and institutions have massive orders to fill and will want to
buy at the lowest possible price and sell at the highest possible
price.
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When price taps into a previous order block we expect a large
volume move, however there should still be confluence with a few
other concepts such as Change of Character, Liquidity, Fair Value
Gaps etc. to confirm the setup.
Bullish Order Block
This is the entire last down candle before a strong impulsive move to
the upside.
We look for price to re-test the bullish order block and we expect to
face a lot of buying pressure, causing a strong up move, similar to the
one previously. We can set our stop loss at the bottom of the order
block and take profit at liquidity levels. Example:
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Bearish Order Block
This is the entire last up candle before a strong impulsive move to
the downside:
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We look for price to
re-test the bearish
order block and we
expect to face a lot of
selling
pressure,
causing a strong down
move, similar to the
one previously. We can
set our stop loss at the
top of the order block
and take profit at
liquidity
levels.
Example:
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High Time Frame OB
Order Blocks are much more significant on higher time frames.
Always perform a top-down analysis where you look at the higher
timeframes first, to identify the key order blocks, and then go down
to a lower timeframe when price enters the order block range to
refine your trade entry.
What makes a good order block?
The order block caused a large volume impulsive move
The order block cleared liquidity with its move
The order block caused a Break of Structure (explained in the
next concept)
The order block has Fair Value Gaps (explained later) directly
either side of it
There is liquidity that still needs to be cleared above a bullish
order block
There is liquidity that still needs to be cleared below a bearish
order block
The order block has not been tested before, so this is the first
time since the initial strong move that price has moved back to
this price area
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Please note: The order block doesn’t need to have all of these
factors, but the more the better.
In-trade management
We usually expect price to react quickly off an order block. Once you
have placed your trade, if price takes a long time to move away from
the order block, it may be worth taking a closer look at the validity of
the order block and potentially closing the trade.
Order Blocks as take profit targets:
It’s important to be able to identify Order Blocks when setting your
take profit targets. You should not set your take profit past an order
block since you are likely to face a lot of resistance or a reversal. Try
to set your targets just before the next order block that suggests a
move against your trade direction:
Break of Structure (BOS)
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Break of Structure (BOS) is an important concept to understand
when identifying the current trend direction and understanding
market structure. We almost always want to trade in the direction of
the High Time Frame trend unless we see a Change of Character
(explained next). BOS is a great signal that the current trend is
continuing, and we should look to take trades in that direction.
If we are in an uptrend, there will be a break of structure every time
a higher high (HH) is formed. In between these highs there will be
higher lows (HL) each move upwards.
If we are in a downtrend, there will be a break of structure every time
a lower low (LL) is formed. In between these lows there will be lower
highs (LH) each move downwards.
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Change of Character (CHoCH)
A Change of Character (CHoCH) is a good signal that there will be a
reversal in trend. CHoCH is a similar concept to BOS, however BOS
indicates a continuation of trend whereas CHoCH indicates a
reversal of trend.
Bearish CHoCH
A bearish CHoCH is where we are initially in an uptrend formed of
higher highs (HH) and higher lows (HL), however after a HH, a lower
low (LL) is formed which is lower than the previous low. This
indicates a change of market structure to the downside, and we can
expect lower highs (LH) and lower lows (LL) to start forming a down
trend. The break past the last HL is the change of character:
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Bullish CHoCH
A bullish CHoCH is where we are initially in a downtrend formed of
lower highs (LH) and lower lows (LL), however after a LL, a lower low
(HH) is formed which is higher than the previous high. This indicates
a change of market structure to the upside, and we can expect
higher highs (HH) and higher lows (HL) to start forming an uptrend.
The break past the last LH is the change of character:
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CHoCH as confirmation on LTF
CHoCH is particularly useful when refining your trade entries on
lower time frames as a confirmation for a trade setup on a higher
timeframe. For example, if we have a HTF order block we are
interested in, when price enters this range, we look for a CHoCH on a
LTF to add confirmation of the move in our direction. Refer to trade
example at the end, where this is demonstrated.
Breaker Block
A breaker block can give us a good trade entry level and helps us
achieve a high reward to risk ratio. It signals an area to enter a trade
on the first retracement after a CHoCH. It should be used in
confluence with the other strategies mentioned in this guide to give
a high probability trade.
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Bullish Breaker Block
This is the area we can expect price to retrace to after a bullish
CHoCH and we should look for buys in this region. The breaker was
previously a level of resistance but now acts as support after the
CHoCH. It is the last up candle before the recent down move as
demonstrated below:
We should place our stop loss at the bottom of the breaker block and
take profit at appropriate liquidity levels.
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Bearish Breaker Block
This is the area we can expect price to retrace to after a bearish
CHoCH and we should look for sells in this region. The breaker was
previously a level of support but now acts as resistance after the
CHoCH. It is the last down candle before the recent up move as
demonstrated below:
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We should place our stop loss at the top of the breaker block and
take profit at appropriate liquidity levels.
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Fair Value Gap (FVG)
A fair value gap is where price has moved too quickly in one direction
due to a strong impulsive move. It is represented on a chart by a
candlestick or multiple that have large bodies in one direction and
usually have small wicks. Anywhere we see fair value gaps we can
expect price to be attracted back to that area at some point in time.
It can be considered a secondary confirmation, so make sure to use
it alongside the other strategies mentioned.
We measure fair value gaps as the body of a candle, from the wick of
the candle directly before, to the wick of the candle directly after.
Here are some examples:
FVGs essentially act as a magnet to draw price back to fill the FVG:
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Fair Value Gaps can be spotted all over the charts, so look out for
them.
We look for FVG’s that are large, quick moves since these are more
likely to be filled sooner.
Once the FVG has been filled, it is no longer valid, and we look for
new FVG’s to see where price will want to move to next.
Also, when we see a FVG near an order block it makes the order
block more valid since it means the order block has high
volatility/price movement around it.
Fibonacci Retracement
The Fibonacci Retracement tool is extremely useful as confirmation
when finding good entry levels. It has been tried and tested by
millions of traders and should be used as a key secondary indicator
for your trade entries. You should try to trade in the direction of the
high time frame trend and the Fib tool can help you enter on the
pullbacks/retracements. The key area to focus your entries on
should be between the 0.5 and 0.618 retracement levels.
Fibonacci Settings (Trading View)
You can find this tool on Trading View (free) and there are a few
settings you should apply to make it easier to use. Find it here and
adjust the settings to the ones shown below:
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How to Use
You should use the Fib tool
on a clearly defined swing
high and swing low and
measure from wick to wick.
It can be used in an uptrend
or downtrend:
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Fibonacci Tool for take profit targets
The Fibonacci tool can also be modified on Trading View to have
extensions which are considered key take profit levels. Remember,
your take profit targets should primarily be liquidity levels, however
the Fibonacci extension levels provide good secondary
confirmation. These are the setting to use on Trading View, the key
extension levels are -0.236, -0.382 and -0.618.
You would see this on your chart to identify the take profit (TP)
targets:
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Elliott Wave Cycle
The Elliott wave theory is a technical analysis approach that uses a
series of fractals to predict market trends. The theory suggests that
market trends move in 5 waves, with 3 waves moving in the direction
of the trend, and 2 pullback/retracement waves moving against the
trend. By analysing these waves, you can predict future price
movements and enter trades accordingly. This is a secondary
indicator, and your trade entries should be based on a combination
of the other strategies mentioned in this guide.
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The key features of the Elliott wave cycle are:
5 consecutive waves
3 waves in trend direction (1,3,5)
2 shorter correction/pullback waves (2,4)
The 3rd wave is the longest wave
Look to exit your position at the end of the 5th wave
To use the Elliott wave cycle to enter trades, you should first identify
the current wave cycle. You can do this by analysing price
movements and identifying the 5- wave pattern. Once the current
wave cycle has been identified, you can use the theory to predict
future price movements.
For example, if the current wave cycle is in a bullish trend, you can
enter long trades at the end of the 2nd wave to catch the 3rd wave
which is usually the longest and strongest in the trend. You can then
exit the trade on the 5th wave, which is the final wave in the trend.
Alternatively for a safer trade, you can enter at the end of the 4th
wave, to catch the 5th and final wave.
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Similarly, if the current wave cycle is in a bearish trend, you can enter
short trades to catch the 3rd wave or the 5th wave.
Example trade walkthrough
(Sniper Entries)
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This is a walkthrough of how to take a trade using different time
frames. You always want to start on a high time frame (HTF) to
understand the overall trend and direction you want to trade in.
In this example we start on the daily chart. We can see the overall
trend direction is down and so we should be looking for SELLS only.
We wait for a pullback to the upside, so we enter a good level to
achieve a high reward to risk ratio. Price is about to enter the bearish
order block, and this is the area we want to look for entries.
We now go down to a lower time frame (15m) to look for
confirmation that price wants to move down. We look for a bearish
CHoCH for sell confirmation. Once we see this confirmation, we wait
for price to pullback to a potential entry level.
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In this case we can see a recent bearish order block on the 15m time
frame that caused the CHoCH. This would be a good level to enter,
since we know this is where banks will be accumulating sell orders
to drive price down. This allows us to get a much more precise entry
compared to if we had just used the daily order block and gives us a
much better reward to risk ratio.
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Once price enters our 15m bearish order block we can place our sell
entry. Our stop loss could be at the top of the order block or at
liquidity at the recent high. In this case we have chosen the safer
option at liquidity.
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We can then go back to the HTF daily chart to set our take profit
targets. We would choose multiple targets at different liquidity
levels and take partial profits at each level:
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For this example trade, we have only used a few of the concepts in
this guide, however the more strategies that coincide with your
direction of trade, the higher probability you will have of winning the
trade. Remember to always look for high probability set ups.
Please refer to our TikTok account @skylinetradersclub for many
more daily examples of these trades and concepts.
News
Fundamental analysis and significant news events can have a big
impact on the markets. I would advise being cautious and not trading
when there are big news releases relating to interest rates, politics,
and data releases. To check when the major events are use
forexfactory.com which can help you prepare in advance.
Some key news events to look out for include:
FOMC minutes
Non-farm payroll data
CPI data
Unemployment data
Politicians or Central Banks speaking
Interest rate changes
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Conclusion
Now that you have learned the ins and outs of entering trades using
these smart money concepts, you are ready to take on the world of
trading. It may seem daunting, but with the right knowledge and
approach, you can turn the volatility of these markets into your
advantage and see big returns on your investments. So, get ready to
dive in, do your research, and develop your own trading strategy to
conquer the exciting world of trading! Who knows, you might just be
the next big success story in the world of finance.
And remember, while the world of trading can be thrilling, it's
important to keep a level head and always prioritize proper risk
management. This means being mindful of the amount you are
willing to invest each trade, setting stop loss orders to limit your
losses, and avoiding making impulsive decisions based on emotions
or hype. By implementing these best practices, you can help ensure
that your trading journey is not only exciting but also sustainable and
profitable in the long run.
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Ask questions about technical analysis and smart money
concepts
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