SMART MONEY CONCEPTS

1. LIQUIDITY
a. Liquidity in forex trading refers to how easily an asset can be
bought or sold without causing significant price movement. In
highly liquid markets, there are many buyers and sellers,
allowing for smoother transactions.
b. Key points about liquidity:
i. For every buyer, there must be a seller, and vice versa.
ii. Many trades are executed by artificial intelligence
(trading bots).
iii. Big banks act as market makers, moving the market with
large buy and sell orders.
iv. A majority of retail traders use similar methods, often
based on common technical analysis, leading to
predictable behavior.
v. This predictability is often exploited by market makers,
resulting in a high failure rate (over 90%) for retail
traders.
c. Types of liquidity:
i. Visible liquidity: Found at obvious levels on the chart.
Examples: support and resistance levels, double tops,
double bottoms. Easily spotted by most traders
ii. Hidden liquidity: Less obvious on the chart. Examples:
trendlines, swing highs and swing lows. Requires more
skill to identify

d. Buyside and sellside liquidity:

i. Sellside liquidity: Found at areas of swing lows, equal
lows, or bullish trendlines. Represents potential selling
pressure or stop losses from long positions
ii. Buyside liquidity: Found at areas of equal highs, swing
highs, and bearish trendlines. Represents potential
buying pressure or stop losses from short positions

e. Price movement and liquidity:

 i. The price will typically move in a pattern where it:
Creates sellside liquidity; Moves higher to grab buyside
liquidity; Moves back down to access the previously
created sellside liquidity.
ii. This pattern often repeats throughout the day, creating
the characteristic "waves" seen in price charts.

2. MARKET STRUCTURE
a. Market structure refers to the overall trend and behavior of the
market. Understanding market structure is crucial for identifying
potential trade opportunities and avoiding trades against the
prevailing trend.

b. Types of market structure:

i. Bullish market structure: Characterized by higher highs
and higher lows; Swing highs are consistently broken;
Swing lows are protected (price doesn't fall below them)
ii. Bearish market structure: Characterized by lower highs
and lower lows; Swing lows are consistently broken;
Swing highs are protected (price doesn't rise above them)
iii. Ranging market structure: Price moves sideways between
support and resistance levels; Market makers create
equal highs and lows; Often used to accumulate retail
positions before a significant move

c. Key principles:
i. "The trend is your friend" - it's generally safer to trade in
the direction of the identified trend.
ii. Avoid trading against the established market structure.
iii. Analyze market structure on higher timeframes (e.g., 4-
hour, daily) and execute trades on lower timeframes
(e.g., 15-minute, 5-minute) to balance risk and accuracy.

d. Break of Structure (BOS):

i. This is a key concept in identifying potential trend
changes.
ii. Bullish Break of Structure: Occurs when a green (bullish)
candle breaks above the high of the previous swing high;
 Forms a higher high, potentially signaling a shift to bullish
momentum
iii. Bearish Break of Structure: Occurs when a red (bearish)
candle breaks below the low of the previous swing low;
Forms a lower low, potentially signaling a shift to bearish
momentum

iv. Note: A Break of Structure can occur with either the body
or the wick of a candle.
v. Swing Highs and Lows: These are crucial elements in
identifying market structure.
1. Swing High: Formed by 3 consecutive candles; The
middle candle has the highest high of the three
2. Swing Low: Formed by 3 consecutive candles; The
middle candle has the lowest low of the three

vi. Importance of Swing Highs and Lows:

1. Used to identify the market trend
2. Considered high liquidity levels (many traders place
stop losses around these points)
3. Help in spotting potential reversal points

vii. Fractality of the Market:

1. This concept recognizes that markets can show
different trends on different timeframes. Example:
The daily trend might be bullish, but a 1-hour chart
might show a bearish move within that larger bullish
trend.
2. Application: Use higher timeframes to determine
overall bias, and lower timeframes to fine-tune
entries and manage risk.

3. Order Blocks
Order blocks are specific candles that, when viewed in an institutional
context, highlight significant smart money buying or selling pressure.
They are crucial for identifying high-probability trade setups.
 a. Key characteristics of order blocks: Represent areas where large
institutional orders are placed; Often precede significant price
movements; Can be bullish or bearish
b. Types of Order Blocks:
i. Bullish Order Block: The last bearish candle before an
impulsive bullish move; This move should break the
previous swing high; A break of structure (BOS) must
occur to validate the bullish order block
ii. Bearish Order Block: The last bullish candle before an
impulsive bearish move; This move should break the
previous swing low; A break of structure (BOS) must occur
to validate the bearish order block

c. Point of Interest (POI) in an Order Block:

i. The POI is typically the area within the order block where
price is expected to return; Traders often enter long
positions on the second retest of a bullish order block;
The initial target is usually the swing high level

d. How to Select Order Blocks:

i. Identify order blocks on higher timeframes (e.g., 4-hour
or daily)
ii. Refine the selection by examining lower timeframes for
more precision; This approach helps reduce risk and
increase accuracy, especially for scalping

e. Order Blocks and Market Structure:

i. Always select order blocks that align with the overall
market structure
ii. In a bullish trend, focus on bullish order blocks
iii. In a bearish trend, focus on bearish order blocks
iv. Trading against the market structure often leads to
stopped-out trades

4. Breakers
Breakers occur when an order block is violated and broken. They're
sometimes referred to as failed order blocks.

a. Types of Breakers:
i. Bearish Breaker: Last down-close candle(s) in a swing low
prior to a higher high; Becomes valid when: Stops are
taken above a previous high (buyside liquidity); Price
breaks below the swing low containing the breaker
candle; Indicates that bulls are trapped and institutions
are mitigating long positions
ii. Bullish Breaker: Opposite of the bearish breaker; Last up-
close candle(s) in a swing high prior to a lower low;
Becomes valid when: Stops are taken below a previous
low (sellside liquidity); Price breaks above the swing high
containing the breaker candle; Indicates that bears are
trapped and institutions are mitigating short positions
Bearish breaker

Bullish breaker
 b. Trading Breakers:
i. Enter long on the retest of a bullish breaker
ii. Enter short on the retest of a bearish breaker

c. Bearish Mitigation Blocks: A special case of breakers; Occur when

price fails to make a higher high before breaking market
structure/order block; Price retests the order block level, creating
a lower low; Most effective after an extensive bullish move

5. Fair Value Gaps (FVG)

Fair Value Gaps are imbalances that occur when a market receives too
many orders of one type and not enough of the other.
a. Key points about FVGs:
i. Created by market maker execution of heavy orders in
one direction
ii. Represent inefficient price levels that the market tends to
revisit
iii. Formed by a 3-candle formation where there's a gap
between the wicks of the first and third candles
b. Characteristics of FVGs:
i. Act as a "magnet" for price, attracting future price action
ii. Cannot be used alone as an entry trigger
iii. Must align with other factors for precise entries
 c. FVGs and Market Structure:
i. In a bullish market structure, watch for long entries when
price fills a bullish FVG
ii. In a bearish market structure, watch for short entries
when price fills a bearish FVG
d. Draw on Liquidity:
i. Price tends to seek out buyside or sellside liquidity before
continuing a trend
ii. Avoid going long in an FVG before sellside liquidity has
been taken
iii. Avoid going short in an FVG before buyside liquidity has
been taken
e. FVGs and Order Blocks:
i. A setup is stronger when an FVG is close to an order block
ii. In a bullish structure, consider long positions when price
retraces to fill an FVG and reaches a bullish order block
iii. Set stop loss just below the bullish order block
iv. Apply the opposite logic for bearish structures

6. Change of Character
Change of Character refers to a significant shift in market structure,
typically from bullish to bearish or vice versa. This concept is crucial for
identifying potential trend reversals.

a. Bearish Change of Character:

i. Occurs when the last swing low is violated
ii. Signals a potential reversal from bullish to bearish trend
b. Key steps:
i. Identify the last swing high that made the first bearish
break of structure
ii. This becomes the point of interest (POI), often an order
block with a fair value gap
iii. Wait for price to return to this zone for a retest
iv. Consider taking a short position after the retest

c. Bullish Change of Character:

i. Occurs when the last swing high is broken
ii. Signals a potential reversal from bearish to bullish trend
d. Key steps:
 i. Identify the last swing low that made the first bullish
break of structure
ii. This becomes the POI, often an order block with a fair
value gap
iii. Wait for price to return to this zone for a retest
iv. Consider taking a long position after the retest

e. Change of Character and Timeframe Refinement:

i. Identify the change of character on higher timeframes
(e.g., 4H or 1H)
ii. Switch to lower timeframes (15m, 5m, or 1m) for
confirmation and precise entry
iii. This refinement helps reduce risk and increase accuracy

7. Inducement
Inducement is a strategy used by market makers to persuade traders
to enter the market, often in the wrong direction.
a. Key points about inducement:
i. Market makers create false impulsive moves to entice
traders into early positions
ii. Once traders are induced, their stop losses are taken out
iii. The price then moves in the intended direction
b. How inducement works:
i. In a bearish trend, market makers may create bullish
order blocks or liquidity zones
ii. These are created purposely to trap unsuspecting traders
into long positions
iii. The price then reverses, hitting their stop losses
c. Trading with awareness of inducement
i. Be cautious of "obvious" setups, especially if they go
against the overall trend
ii. Always ensure that liquidity has been created and taken
out before entering the market
iii. Look for confluences of multiple factors rather than
relying on a single signal

8. Premium and Discount Price

These concepts help identify optimal entry points for trades
based on price retracements.
a. Premium Price:
i. Occurs in a bearish trend
ii. The highest price where you can sell at a given time
iii. Located above the mid-point (0.5 level) of the Fibonacci
retracement
iv. In a bearish trend, expect price to retrace to the premium
level before taking a short position

b. Discount Price:
i. Occurs in a bullish trend
ii. The lowest price you can buy at a given time
iii. Located below the mid-point (0.5 level) of the Fibonacci
retracement
iv. In a bullish trend, expect price to retrace to the discount
level before taking a long position

c. Equilibrium Level:
i. The point where buying and selling pressure is equal
ii. Represented by the mid-point (0.5 level) of the Fibonacci
retracement
iii. Helps determine when to enter the market and in which
direction

d. Using Premium and Discount Levels:

i. These levels should not be traded in isolation
ii. Combine them with other smart money concepts like
order blocks and fair value gaps
iii. A high-probability setup should include all three
elements: FVG, OB, and Premium/Discount level