Smart Money Concepts (SMC): What Are They Really?

Smart Money Concepts: Reality or Hype?!

If you’ve been trading for a while, you’ve probably noticed that there’s always a strategy or set of concepts that’s the flavor of the month. Right now, it happens to be the Smart Money Concepts from ICT: The Inner Circle Trader!

Not long ago it was Ichimoku, then came Renko charts, by way of the Elliott Waves, and so on… In short, there’s always a trendy new method to make you believe that trading isn’t really “all that complicated” after all.

If you haven’t come across it yet, soon it might be the turn of the Smart Money Concepts, aka SMC — whose vibe has, in fact, already begun.

Recently, I’ve had a lot of requests for information about SMC. That’s why today I’m diving in with an analysis on the subject that I’ll add to every week over the summer. The goal is to answer as many of you as possible.

If you follow English-speaking influencers at all, you’ll regularly see presentations and demos of intraday setups at 10 or 20R ( Risk: Reward ).

As for me, you know I’m not really a fan of these kinds of setups, because they’re far too risky. When the market runs hot, all it takes is one poorly managed/set Stop Loss to lose a LOT!

Careful not to confuse this with the expression Smart Money, a notion used during company formation and other fundraising rounds to quantify the value of non-financial contributions such as an investor’s skills or contacts…

Smart Money Concepts: Definition

SMC trading is, in a way, a spin-off of the teachings that come from ICT (Inner Circle Trader). After a little digging — looking at the publication dates of the videos on SMC — it’s fairly obvious that the first person to talk about this concept relentlessly is indeed ICT. That doesn’t stop me from drawing on certain similar concepts I picked up elsewhere, like ideas around Order Flow or liquidity Pools. By the way, a reminder that all my charts are marked up with TradingView

https://www.tradingview.com/x/kQgux1sK/

In short, according to SMC traders, markets are fundamentally driven by the constant manipulation of price by “smart money” in order to sweep retail traders’ stops and create liquidity.

ICT calls these people “Market Makers,” a term I’ll come back to a little later because, once again, it isn’t necessarily the right one.

Smart Money Concepts: The Reasons for Its Success

One of the reasons these concepts resonate with the public is the myth surrounding them, built on a repurposed glossary.

The term Smart Money gets reinvented, people talk about manipulation, and so on… Overnight, it feels like everything suddenly makes sense. Then you start to think you’ve moved beyond retail-trader status simply because you’ve grasped a few key concepts.

If you want my take on this: in my view, as long as you’re not representing a fund or an institution, you’re very much retail.

The big trick of ICT and SMC traders is to rename things — and thereby overcomplicate them to excess — to make them more appealing, and so make you believe you have privileged information that’s hidden from everyone else.

In reality, the “Smart Money Concepts” do work in trading, but not at all for the reasons given.

In fact, if you really think there are lots of traders making money spending the whole day on 1-minute charts with the sole hope of hunting retail traders’ liquidity, then you may already suspect there’s a slight ambition problem.

That said, you do have to admit these concepts work, which is also why I’m taking the time to write about the subject.

Indeed, markets often trade above/below previous highs/lows and reverse from there. The Order Blocks and the signals they suggest aren’t illusions either…

Now let’s look at why you always have to keep your feet on the ground.

Smart Money Concepts: Objectives vs. Reality

It all comes down to having realistic expectations. Before we even glance at the strategy itself, it’s important to understand that few SMC influencers are actually profitable in their trading.

If you dig into the subject, you realize that ICT never actually promotes this type of trading.

The “asymmetric R” trend makes people dream: risking little to win big is every investor’s idea of bliss. It’s also one of the concepts that make SMC shine.

If you hear about a trade with an R:R (Risk to Reward) of 2.5, it means it’s targeting a gain equal to 2.5 times its risk. In other words, when you risk $1,000 on that trade, you’re targeting a gain of 2,500-1,000 = $1,500.

So with 10 R, assuming you’re also trading $1,000, you’re supposedly able to make 10,000 – 1,000 = $9,000.

So why can’t you pull off 10R like most English-speaking influencers?

You know… the ones showing you the best setups in the universe?!

A Classic Example of a “Flashy” SMC Post

As I’ve already hinted, there’s a problem…

The easiest way to describe why it isn’t realistic to make 10R trades every single day is to assume for a moment that it is possible.

So let’s assume…

Trading on a one-minute chart offers a fair number of trading opportunities over the course of the day. So let’s say you follow 2 or 3 markets and enter at least two trades a day most of the time.

There are some nice case studies on Insta, TikTok or Twitter where you spot setups with a profit of 5R, 8R and 10R on a regular basis — or that give the illusion of something easily within reach.

So no, it’s not impossible to land a 10R trade; aiming for an average of 10R frequently and consistently, on the other hand, strikes me as far harder. It can make for a fine end-of-career goal, but thinking it’s the norm among competent traders makes no sense.

If we start from the premise that your average R is above 6 but your win rate is 20%, your long-term results will be excellent, but psychologically it will be very hard to live with.

One of the biggest challenges a trader faces — a beginner especially — is losing money. The number 1 cause of the big losses beginners run into is the inability to close losing positions.

So let’s assume you’ve managed to develop the skills needed to close your losing trades without flinching. (some still can’t, even after more than 4 years).

You’d also have to come to terms with the fact that 8 out of every 10 entries will be losers, based on the random outcome of your 20% strategy.

So you could end up losing 8 trades in a row… And that’s really no fun; doubt creeps in and, most of the time, people give up. It’s natural — you need wins to keep your motivation alive!

On top of that, your equity curve would look completely erratic, whereas when you’re starting out and trying to prove yourself, you should opt for something steady and “soothing.”

In a first example — mine! I’m working from a PnL curve and account size of my own, with a win rate of 61.64% over 232 trades and an average of 1.8R per trade.

Which already makes for a nice curve and pretty solid performance for a “pro trader.”

In a second one, here’s what your capital would look like assuming you have a low win rate but a very high R. The curve would be quite different, and far more volatile, with a win rate of 20% and an average of 6R.

Stomaching that kind of volatility becomes a tricky business for a budding trader…

Trading is already a psychologically demanding activity that requires dedication at every moment; I don’t recommend adding another layer by shooting for the moon on every single trade. In trading, your capital is built over the long term, not on a few lucky trades.

So no, it’s not impossible — but it’s very likely not accessible to a beginner trader.

Market Makers, the Culprits?

Manipulation is a key term for explaining market movement according to SMC.. So naturally, when you’re a beginner and you lose on a regular basis, hearing the word manipulation feels good.

The strategies tied to the Smart Money Concepts rest mainly on the so-called “manipulation” by Market-Makers.

The strategy’s whole payoff supposedly rests on the fact that market makers have one sole aim: to hunt the stop losses of “retail” traders (i.e. retail traders).

The reality is quite different, since the role of market makers is mainly to provide liquidity and create a smooth market. Their aim is to take on as little risk as possible. They make their money on the spread, whichever way the market goes.

Given that we’re trading in a market that has become ultra-popular, all you have to do is pick a platform well stocked with liquidity, and you’ll be sure to get your orders filled without the slightest problem.

As a reminder, for scalping I recommend Bybit because it’s one of the platforms that still offers futures in France, but above all because it’s the platform with the deepest liquidity. Orders are therefore filled very quickly, which is essential when you trade on small timeframes.

Of course, there are manipulation cases of all shapes and sizes. Obviously there are whales and big hands capable of exerting significant pressure on the market, or even hunting for accessible liquidations.

That said, in my view the only party truly responsible for manipulation…. I’d sooner say it’s our famous Composite Operator: institutional players and other whales. A concept to study and revisit through my tutorial on the Wyckoff method.

Liquidity and Order Flow

When it comes to ICT and the Smart Money Concepts, the words “Liquidity” and “Order Flow” come up a lot.

First and foremost, their strategy is based solely on Price Action. In fact, you can consider level 1 Order Flow an important pillar of my method, because I use it often — when I talk about absorption for example.

If Order Flow is a concept that interests you, I’ve also made a full tutorial on the subject.

Personally, I use Quantower, which can also serve as a console to trade directly from the charts. If using this kind of chart appeals to you, you can also get a discount through my referral.

To wrap up, know that it’s essential to understand that Order Flow is the most detailed view of the market and of price. There are also several tools out there to help you extract the key information from it.

Smart Money Concepts and Liquidity

The concept of liquidity plays a key role in trading according to SMC — and in my trading too. Another thing I share with SMC.
The most obvious liquidity to hunt for sits below the lows and above the highs.

These are zones where retail traders place their Stop Losses, and these are precisely the zones regularly hunted by the “Smart Money.”

Once again, the reason these moves happen is far more conventional and boring.

It all comes down to Order flow, and to how market participants position themselves at certain levels. It also comes down to the fact that some participants need extra liquidity in order to get in discreetly.

If you trade using Elliott Waves, Gann boxes or any other highly subjective strategy, it will be hard to find levels with genuine signal confluence …

But for those who use simple horizontal levels — possibly diagonal ones — or even something like the famous Moving Averages (50, 100, 200), you’ll notice confluences standing out.

All financial markets operate on a two-way auction system, which means that for every buyer there has to be a seller, and vice versa.

When the market reaches something like a horizontal S/R level, it generally triggers two types of events.

Of course, there are stops that get triggered, but in many cases you’ll notice traders and algos trying to force the move to continue beyond the expected levels.

If you look at the example above on the MATIC/USD chart, once price broke the support line, it triggered the stop orders of long positions; those stop orders are sell orders. That move helped create sell-side liquidity to feed buy positions.

What’s more, new sell orders come into the market from those trying to trade the continuation of the trend.

Since for every buyer there has to be a seller (and vice versa), this aggressive selling pressure creates a perfect environment for the big players looking to get into Long positions.

As you’ll have gathered, I’ve always been wary of fortune-tellers; that said, there’s good to take from it too. I also hope you’ll keep your own feet on the ground when you see potential 10R trading plans go by every day.

Happy Trading, everyone!