The article was written for Encrypted by one of the members of the trading training product team – Cryptomannn. Smart Money Concept More details about the project and training can be found at the link. We also have a playlist on our YouTube channel with the main representatives of the Cryptomannn project.
You have probably come across this concept more than once because it is gaining more and more popularity. However not everything that the majority calls and means by this concept is related. To it and sound logic in general.
Market Efficiency Paradigm
- Small speculators or retail traders (also called Stupid Money (stupid money), speculative/ignorant money) – occupy a larger amount in the market.
- Large speculators are hedge funds and professional traders who have large positions.
- Commercial speculators are central banks, (Smart Money) – the participants. Which are fewer in number, but they have the most influence.
According to the ICT market efficiency paradigm. The dominant side of any market is occupied not by Smart Money. But by uninformed retail traders or large funds that speculate with funds.
What does it mean?
Despite their numbers, uninformed money is not the price driver as they used to believe it. Connect Binance Smart Chain to MetaMask But commercial speculators have the power to decide when and where the price will go.
As we know, if someone wins in the market, then there is a loser.
Statistics are not on the side of retail traders. Smart money uses the liquidity of retailers and large speculators to sponsor their positions. As we will discuss in the next paragraph.
To sum it up. Smart Money (SM) are central banks that have enough capital at their disposal. To create manipulations and price movements in the market.
Smart Money → driver. Large and Small Speculators → liquidity.
What is the essence of the concept and what is the task of an SM trader?
The difference between classical analysis and algorithmic price movement.
The classical analysis is perhaps where the majority began their acquaintance with the market.
Support and resistance, trendlines, indicators, and classical analysis patterns. Even if it worked for some time in your trading, in the long run. Using them without understanding the context of the price movement will not bring good results.
Why?
- There is no clear understanding of cancelling a trading idea.
You cannot predict how many times the price will test the level and when it was a false breakout and when it was true. - These levels are rather arbitrary.
- The SL and TP levels are devoid of logical justification.
Despite this, the simplicity of these tools and easy access to a large amount of material about them is attractive to a predominant number of traders. And the majority, as we know, loses.
Commercial speculators operate according to an algorithm whose logic is to exploit. The weaknesses of human nature are to provide liquidity for their positions.
They form liquidity pools (places where there will be a large accumulation of retail traders’ stop orders). Best crypto to buy now after this, they manipulate by collecting this liquidity (by activating retail stops). And thereby sponsor the movement in the opposite direction.
The task of a Smart Money trader is to understand in which direction. SM will move the price and work in this direction, taking into account the retail logic.
Ask how to understand in which direction SM will move the price.
The primary source of information for an SM trader is the price. Based on this it is possible to determine the direction of the subsequent movement. Therefore all SMC technical tools are based on Price Action.
We will talk in more detail about the technical tools of the SM trader in a separate article.
Who is behind the term and the spread of the concept?
He argues that the main thing in the analysis is:
- Time.
- Price.
Time refers to trading sessions – the period when exchanges open and big players enter the market, which increases the level of volatility and creates favourable conditions for trading.
ICT eliminates the use of any indicators to predict price movements, everything you need to know for analysis is already on the chart in the form of a price display.
Will SMC stop working if a lot of people already know about it?
No matter how many people have information, SMC will remain relevant due to the fact that the algorithms are based on the behavioural and psychological patterns of people that never change. Moreover, do not underestimate the level of misinformation and misinterpretation of the context and use of tools that is prevalent in the Internet space.
Disadvantages and problem areas in SMC
We must also not forget that this approach to price analysis is not a golden grail, and even those traders who have mastered this concept cannot anticipate and monetize every move in the market.
Context
The amazing fact is that 3 completely different people have 3 different analyzes of a particular graph, but they can all be right.
Context is a term in which everyone puts their idea. As you might guess, this becomes the most important vulnerability, since it is quite difficult to convey your vision, in any case, some part is tied to intuitive trading (experience of experienced situations), and intuitive trading, the physical observation of the eye works, where certain patterns can cause triggers position opening.
Context is an abstract concept that causes the most problems at the start since dozens of situations are quite difficult to bring into a comprehensive picture. It is a natural process when inexperienced traders look and try to adopt in detail the trading method of already experienced ones, however, over time, everyone will understand that he will derive his own context, and this will be influenced by many factors: life, finances, character, psycho type, second job, and so on.
Variables
Having an indefinite number of variables that affect the overall schedule score can complicate the decision-making process.
Depending on the strategy, a trader has a number of summarized factors that are most important for him to make a decision to open a position. However, the concentration and consideration of many factors and the inability to filter them can adversely affect trade.
Such a trader will select all the instruments on the chart at the same time, there will either be a constant lack of factors for making a decision and the trader will be waiting for an ideal situation, which in turn will lead to the loss of good opportunities, or the trader will open too many low-quality positions.
Theoretical trading
The concept is aesthetic and many are attracted by the feeling of a difficult process, where a bunch of terms on the chart add up to an analysis of what else can bring profit. However, many are so addicted to the graphic part that they completely forget about the auction. Tons of beautiful backtests, summaries… But the presence of a skill will determine only the number of real positions, real losses and their detailed analysis.
The illusion of big
Popularization to the masses always occurs through the main trigger – “This will allow you to earn more.” High RR positions and too short periods create the illusion of quick and easy money where everyone gets burned in the end. At first, no one unequivocally analyzes secondary factors, such as market liquidity, commissions for positions, the inability to realize high-quality volume in some situations, and this is again a favourite word – context. Profitability is determined only by the risk of the system and position management, and not by the type of analysis.
An excess of a large amount of information that is not filtered
Many are immersed in information addiction with the thoughts that new knowledge will bring more profit. But the origins are the classic Price Action. which is hundreds of years old, it just received a new cover, improved by studying algorithmic trading and its use on almost all trading pairs, regardless of the market. When there is not enough general expertise in the market, slipping something new is quite simple, it is nothing more than a marketing ploy.
Conclusion
The concept of Smart Money (SMC) is a new approach to investing that allows investors to make informed decisions in the market. It is based on the use of data and analytical tools to predict the movement of the market and make rational decisions based on this information. This helps investors avoid common mistakes and minimize the risks of their investments.
However, it should be remembered that the use of the Smart Money concept is not a guarantee of success in the market. This is just one of many factors to consider when making investment decisions. In addition, the use of analytical tools can be difficult for novice investors, so it is necessary to carefully study the market and master the relevant skills.
Thank you for your attention. Most of the knowledge we all owe to ICT. Its contribution will remain forever in the development of the next generations but do not make yourself a cult.
