Smart Money Concepts (SMC): What Is Behind Them?

Smart Money Concepts (SMC) have become a widely studied approach for traders who want a clearer view of how major institutions influence price. Instead of relying only on standard tools, this method focuses on market structure, liquidity and the behaviour of large players such as banks and funds.

This article breaks down the basics of SMC trading, providing an overview of its components, how traders use the core ideas to analyse markets, and the advantages and drawbacks of the approach.

Key Takeaways

Smart Money Concepts focus on analysing institutional behaviour rather than relying only on standard technical tools.
Key ideas include trend structure, liquidity areas and zones linked to earlier institutional activity.
The framework aims to explain why price moves, not just how it moves on the chart.
SMC may support traders in organising their analysis and setting clearer invalidation rules.
It works across major markets, including forex, shares, indices and commodities.

What Is the Smart Money Concept?

The Smart Money Concept (SMC) is the method that allows retail traders to understand the market behaviour of large institutional investors in financial markets and identify future market trends. These institutional investors, often referred to as “smart money,” include banks, hedge funds, and investment firms, wielding significant capital power to influence market directions.

The core of SMC lies in the belief that by observing and understanding the trading behaviours and patterns of these entities, retail traders can align their trading strategies to potentially tap into more favourable results.

In essence, SMC is not merely about following the “money” but understanding the strategic placements and movements of these large volumes of capital. Institutional investors typically conduct extensive research and possess a deep understanding of the market dynamics before making substantial trades.

Their actions, therefore, are often indicative of a broader market sentiment or an impending significant market move. By deciphering these signals, retail traders can gain insights into market trends before they become obvious to the wider market.

Understanding SMC requires a shift in perspective from focusing solely on technical indicators and price action to considering the market's psychological and strategic elements. For retail traders, leveraging the Smart Money Concept means navigating the market with a more informed approach, using the trails left by institutional investors as a path to smarter trading decisions.

Who Is the Founder of the Smart Money Concepts?

Smart Money Concepts didn’t start with one person. Traders have studied institutional behaviour for decades, drawing on ideas from Wyckoff, market microstructure theory, and early analyses of accumulation, distribution, liquidity, and stop-driven price movement. These ideas shaped the foundations of what later became known as Smart Money Concepts.

In modern trading communities, Michael J. Huddleston, known as the Inner Circle Trader, or ICT, played a major role in packaging these principles into a clear framework. He organised concepts like Break of Structure (BOS), Change of Character (ChoCH), order blocks, and liquidity into a structured approach that retail traders could study. While he didn’t invent the underlying ideas, his work popularised them and pushed the methodology into mainstream retail trading.

How May Retail Traders Use the Smart Money Concept for Trading?

Retail traders use smart money concepts to read market structure in a more organised way and analyse where large participants position orders. The aim is not to copy institutional trading, but to understand the logic behind major moves and align decisions with broader flows.

1. Studying trend shifts

Traders often use SMC as concepts to analyse when momentum strengthens or weakens. Through examining key highs and lows, they build a clearer view of trend direction and avoid working against larger market flows.

2. Mapping liquidity areas

SMC encourages traders to look for zones where resting orders commonly sit, such as major highs, lows or consolidation points. This creates a framework for analysing where price may gravitate before moving in a new direction.

3. Tracking institutional footprints

Rather than reacting to every price swing, traders focus on areas where strong moves began. This highlights zones where institutions previously acted, giving clues about where interest may return.

4. Timing entries more precisely

Once the broader structure is understood, traders use SMC to study retracements and wait for price to revisit areas linked to earlier institutional activity. This may keep entries disciplined rather than rushed.

5. Strengthening risk management

SMC encourages traders to build clearer rules around invalidation levels, structure breaks and areas where the bias changes. This may potentially support more consistent risk control.

SMC Concepts vs Price Action: Major Differences

SMC and price action both offer structured ways to analyse markets, but they focus on different layers of behaviour. Price action studies raw movement, while SMC looks beneath that movement to interpret institutional intent.

Specifically, price action focuses on:

Analysing past and present price movement without external inputs.
Using candlestick patterns, chart formations, and support and resistance levels to interpret market behaviour.
Keeping analysis simple by relying on visible price data and immediate price reactions.
Highlighting trend continuation or reversal based purely on what appears on the chart.

While SMC trading strategy focuses on:

Studying how banks and funds move capital in and out of the market.
Identifying elements like order blocks, liquidity zones, and fair value gaps to read intent behind each move.
Mapping out where liquidity sits and how institutional players may seek it.
Providing context around why price moves, not just how it moves.

Price action offers a clean, accessible view of market structure. SMC adds depth by connecting that structure to institutional behaviour. Many traders combine the two to build a more complete understanding of market movement.

What Are the Basic Smart Money Concepts?

The Smart Money methodology introduces several foundational concepts that provide traders with a framework to interpret market movements through the lens of institutional activities. These basic concepts include order blocks, breaker blocks, Breaks of Structure (BOS), Change of Character (ChoCH) events, fair value gaps, liquidity, and accumulations/distributions.

Order Blocks

Order blocks represent areas where institutional investors have placed significant orders, usually in the form of a range. These blocks often precede a strong market move in the direction of the block, serving as a signpost for areas of interest to “smart money.” When the price returns back to this zone, it’ll often reverse (similar to an area of support or resistance).

Breaker Blocks

Breaker blocks are essentially failed order blocks. When an order block fails to hold the price, it breaks through, potentially indicating that the “smart money” direction has changed. When the price breaks above or below the order block, it can then act as a barrier for prices in the future (similar to the way an area of support can become resistance and vice versa).

Break of Structure (BOS)

A Break of Structure (BOS) is the concept that reflects a continuation of the current trend. It occurs when the price surpasses a significant high or low, indicating a potential change in market trend. It signifies the end of one market phase and the beginning of another, offering clues about “smart money”’s influence on market direction.

Change of Character (ChoCH)

The Change of Character refers to a notable alteration in the market's behaviour, often seen through an abrupt increase in volatility or a shift in price direction. A ChoCH usually follows a BOS, confirming a potential trend reversal and suggesting a new phase of market sentiment driven by institutional activities.

Fair Value Gaps (Imbalances)

The Fair Value Gap represents areas on the chart where price moves quickly through, leaving a gap that indicates an imbalance between supply and demand. Institutional traders often target these gaps for potential returns, so prices tend to move back to fill them over time.

Liquidity

In the context of SMC, liquidity is the area where “smart money” is likely to execute large orders due to the availability of opposite market orders. These are areas where stop losses and stop orders (to capture a breakout) are likely resting, usually around key highs or lows, trendlines, and equal highs/lows. The concept states that “smart money” is likely to push the price into these areas to execute large orders before the true market direction unfolds, as in a bull or bear trap.

Accumulations/Distributions

These phases indicate the period during which “smart money” is either accumulating (buying) or distributing (selling) their positions. Rooted in the Wyckoff theory, an accumulation occurs at lower price levels, often before a significant uptrend, while distribution takes place at higher price levels, typically before a downtrend. Identifying these phases can provide insights into the future market direction favoured by institutional investors.

Steps to Trade Smart Money Concepts in Forex

SMC forex strategy requires a nuanced understanding of market dynamics and the ability to interpret signs of institutional involvement. Below, we’ll take an overview of the approach. You can consider following with real-time charts on FXOpen’s TickTrader platform.

Determining the Trend Using Breaks of Structure (BOS) / Change of Character (ChoCH)

Traders can identify the market trend by observing BOS and ChoCH. A trend is typically recognised by a series of higher highs/higher lows (uptrend) and lower lows/lower highs (downtrend).

Trend continuation is seen when there's a clear BOS, where the price surpasses a significant high or low, signalling a shift in market direction. Following this, a ChoCH, an abrupt change in market behaviour, may confirm the new trend. Identifying these elements allows traders to align with the market's momentum, providing a strategic framework for setting a direction.

Identifying an Order Block

The next step involves pinpointing areas where institutional traders are likely participating, often signalled by a BOS or ChoCH. Traders look for the range that initiated this shift (marking an order block), with increased odds of accuracy if there's a pronounced move away from the range to create a fair-value gap or if it aligns with a breaker block.

The presence of liquidity near these points, or if it was targeted to initiate the BOS or ChoCH, can further validate the significance of the order block. This phase is important for understanding where large volumes of trades are being placed and where the price may revisit before continuing the trend.

Finding an Entry Point

Once an order block is identified, finding a strategic entry point becomes the focus. Traders typically either position limit orders at the edge of the block or await specific candlestick patterns, such as hammers, shooting stars, or engulfing candles. These signals suggest a possible continuation of the trend, providing a cue for entry. However, other tools, like Fibonacci retracements or indicators, can also be used to identify an entry point within SMC.

SMC Trading: Advantages and Limitations

Smart Money Concepts are popular because they can offer a structured way to read institutional behaviour, but the framework has strengths and clear limitations. Understanding both sides keeps expectations realistic and prevents traders from relying on it blindly.

Advantages

Clear structure for reading price movements: SMC breaks the chart into elements like order blocks, breaker blocks, and liquidity areas. This may offer a consistent way to analyse market behaviour.
Focus on institutional activity: The approach directs attention to areas where banks and funds often transact large volumes, potentially helping traders understand why price targets certain zones.
Useful for refining timing: Concepts such as fair value gaps and inducements allow traders to study where price often retraces before continuing a trend. This creates a logical sequence for building a plan.
Works across many markets: Because it is based on structure and liquidity, SMC applies to forex, shares, indices and commodities. The principles remain similar even as conditions change.

Limitations

High complexity: The terminology and layers of analysis can overwhelm newer traders. Misreading structure can lead to confusion and poor decisions.
Subjective interpretation: Order blocks, liquidity levels and ChoCH vary from trader to trader. This reduces consistency unless clear rules are determined.
Not a complete system on its own: Traders still need risk rules, data awareness and patience. SMC supports analysis, but it does not remove uncertainty from trading.
Market conditions affect reliability: During high volatility or news releases, SMC concepts often break down as institutional behaviour becomes harder to interpret.

The Bottom Line

The Smart Money Concept provides a structured way to analyse how institutional activity shapes market movement. It highlights where major players position orders, how trends shift, and why price targets specific areas. The framework may give traders a clearer view of market mechanics and support more disciplined planning.

If you want to apply these concepts in real conditions, you can consider opening an FXOpen account and access tight spreads, low commissions, and detailed charting, suitable for analysing SMC principles.

FAQs

What Is the SMC (Smart Money Concept) in Trading?

The Smart Money Concept (SMC) is a trading approach focused on understanding and leveraging the market movements initiated by institutional investors, such as banks and hedge funds. It posits that by identifying the trading behaviours of these major players, retail traders can build more comprehensive trading strategies.

What Is the Smart Money Theory?

Smart Money Theory states that institutional investors influence long-term market direction through large orders, research, and strategic positioning. Traders study their behaviour to analyse where capital flows and which price areas attract attention from banks, hedge funds and other large participants.

What Is Smart Money?

Smart money refers to capital controlled by major institutions with extensive resources, data access and market experience. Their activity often shapes liquidity, trend development and major turning points. Traders study these movements to align with the flow of larger, more informed participants.

Does the Smart Money Concept Work in Crypto*?

SMC principles apply to crypto* because liquidity, stop placement and institutional activity still shape price movement. Concepts like order blocks, liquidity zones and fair value gaps appear across major coins, especially as larger funds and market makers play a growing role in digital assets.

What Is SMC Trading Strategy?

The SMC strategy in trading involves identifying patterns and signals that indicate the involvement of institutional investors. This includes analysing order blocks, liquidity zones, breaks of structure (BOS), changes of character (ChoCH), and fair value gaps. By aligning with these signals, traders aim to position their trades in harmony with the actions of the “smart money.”

Which Timeframe to Use for SMC Trading?

The choice of timeframe in SMC trading should align with the trader's goals and strategy. Short-term traders may prefer 1-hour or 4-hour charts for quicker insights, while long-term traders might opt for daily or weekly charts to capture broader market trends influenced by institutional movements.

Is SMC Better Than Price Action?

SMC and price action cater to different aspects of market analysis. While a smart money strategy focuses on institutional movements, price action concentrates on the patterns formed by the price itself. Neither is inherently better; their use depends on the trader's strategy, market understanding, and comfort with the concepts. Integrating both can offer a comprehensive approach to market analysis.

*Important: At FXOpen UK, Cryptocurrency trading via CFDs is only available to our Professional clients. They are not available for trading by Retail clients. To find out more information about how this may affect you, please get in touch with our team.