Building a Winning SMC Trading Strategy: Key Components and Methods

Intro

The financial markets are full of trading strategies and notions of all kinds. One of the most distinguished and respected approaches is the Smart Money Concepts Strategy (SMC). 

Highly effective in traditional markets, it has been translated to the crypto world with accepted results.

In the following sections, we will delve into these concepts and discuss their structure.

Smart Money Concepts (SMC): The Base of Price Action?

Smart Money Concepts are the foundation for a leveling-up understanding of the traditional price action concepts. This idea gives a structured approach to the price movements in the market, trying to comprehend why money is flowing in the form that it is so during a period.

SMC strategy is essentially a set of conceptual tools referring to and tracking the capital placed in the market, having as its main focus institutional investors, market mavens, central banks, professional traders, and, in the case of cryptocurrencies, the whales.

SMC, in any case, will try to decipher the market dynamics and take advantage of detecting professional traders' presence and their manipulation moves.

These concepts go hand in hand with those from traditional trading, like:

• Support and Resistance.
• Demand and supply zones.
• Range Breakouts
• Trends

SMC Concepts role in the crypto Market

For traditional markets, institutional traders were the case of analysis, but with the rise of crypto markets, the "whales" are a new kind of institutional trader.

They hold large amounts of coins and can move the price of an asset like institutions would do in the traditional market, however typically not for the same reasons.

This is something to remark on for the right understanding of these concepts, their origin, and how to adjust them for cryptocurrencies. So, which aspects to consider regarding the crypto market and its differences from the traditional? Let's try to point out some:

1. Cryptocurrencies are related to specific projects. Events related to their projects can significantly move the price despite macroeconomic news.
2. High speculation.
3. High liquidity.
4. Increased volatility

SMC Strategy and Market Structure: Key Concepts

SMC is not an inflexible set of rules but rather an integrated system of structured ideas for analyzing market behavior, aiming to bring in front what's happening behind.

The "market structure" is one of the core concepts driving the analysis of smart money traders. The support and resistance alongside candlestick formations represent viewpoints of important pieces of information.

Here is a list of the essential bases that form the structure of this strategy:

Market Context

Factors like interest rates, inflation, and industry-specific news might influence market sentiment. In the case of the crypto market, having a broader viewpoint of the different events moving the price of an asset is especially relevant since this is an ever-evolving market.

Price Action

SMC traders don't use indicators as a primary tool, but price movements are the primary focus. SMC traders intensely examine candlestick patterns, seeking footprints of institutional money action to identify potential turning points or areas of consolidation.

Supply and Demand Zones

These areas are highly effective for this strategy. They represent high buying or selling pressure points. Analyzing these zones and the price movements involved are key to drawing support and resistance levels, finding order book imbalances, and volume surges.

Market Structure

Analyzing the uptrends, downtrends, or ranging seasons as the overall trend of the market is elementary. SMC traders often utilize swing highs and swing lows to determine the market structure and identify likely breakouts or reversals.

Timeframes

SMC emphasizes the importance of analyzing multiple timeframes (daily, weekly, monthly). This provides a multi-dimensional viewpoint on the market and helps confirm potential trading signals.

Risks consideration: avoiding market manipulation

Smart Money Concepts indeed have great effectiveness in trading, however, it is not exempt from pitfalls for traders to get involved in. Like any other approach to trading, SMC traders could face false signals and wrong analysis.

It is necessary to remark that, in fact, the goal of Smart Money Traders is to try to follow the path of the professional traders, the "big boys", those who can "manipulate" the price of an asset. 

In that sense, SMC traders can fall into the same traps they are trying to avoid and rather take advantage of.

But which are those traps? Let's point some out:

1. False Breakouts.
2. Stop-loss hunts.
3. Market manipulation.

Which could lead to those traps?

1. Wrong interpretation of price action.
2. Misidentifying Order Blocks.
3. Wrong analysis of market structure.
4. Lack of information on the overall context.

Risk Management: How to overcome market manipulation traps?

Any trading system built on top of Smart Money Concepts needs to take into account smart trading tools, rules of capital management, risk-reward ratios, and entry/exit points.

Since market manipulation is unpredictable, traders could face stressful situations like:

1. Emotional trading.
2. Psychological exhaustion.
3. Impatience or overtrading.

Trading Plan: Example

To overcome stressful situations, it is the best practice to stick to a trading plan. Let's illustrate an example.

Conclusion And Call to Action

Smart Money trading is in essence a framework to face the crypto market with cunning. It provides traders with conceptual tools to analyze the market aiming to make better-informed decisions since SMC relies on the idea of detecting the "strong hand" moving the price and the zones they could be present in.

We created a trading plan as an example of how this framework could be used. However, it is just an example and should be adapted considering personal goals, the type of trading, whether it is day or swing trading, and risk tolerance.

Altrady is an excellent crypto platform to start analyzing the market structure and testing SMC strategy with a free trial account on paper trading.