Smart Money Concepts for Forex ( PDF )
Smart money concepts in Forex markets represent an impressive approach that is built on the manipulation of the Forex markets to engineer liquidity. In general, this concept shows the ability of important financial institutions to impact price movements and create new forex trends. Indeed, smart money concepts in Forex can provide market actors, either retail traders or big institutions with multiple information about the overall market condition. So, as a new trading method, it helps them to understand the total movement of the Forex market.
Smart Money Concepts Forex
What is smart money concept in forex?
Smart money concepts Forex defines a general approach when trading currencies. In fact, to understand the main idea behind this concept we should first learn about “Smart Money”.
Actually, smart money doesn’t consider a trader’s intelligence as more as it refers to its impact on the market. To further explain, smart money refers to a group of actors in the Forex market that has the ability and the power to move the price market. Those important players are mainly “Banks” and “Institutions” with a huge force of money. These smart money traders can easily influence volumes and prices in the live markets.
In fact, this category of traders includes Central Banks, Hedge Funds, Big Interbank, and global companies. That has enough volumes and liquidity to manipulate the market.
Nevertheless, banks and big institutions trade forex currency with higher volumes than retail traders. They are the players who are consistently correct about the market. That is why market actors describe them as “market makers”.
In other words, we can consider smart money as the amount of money invested by Banks levels and institutions with a great knowledge of the Forex market, which retail traders cannot approach.
So by returning to our main subject ” smart money concepts in Forex”, we can tell that in every market we can find retail traders as well as institutions. Thus, Forex retail’s mindset is the same across all currency pairs. That is where the smart money concept comes in handy. Hence, it helps to comprehend where the retail traders are being manipulated, and where smart money ( big players ) are entering or exiting.
How does the smart money concept work?
Indeed, the overall idea of the smart money concept is based on the fact that with an understanding of market psychology as well as being able to deal with large position sizes, the banks, and the financial institutions can manipulate the Forex market. To clarify, we all know that like all financial markets, the Forex market is based on the universal rule of supply and demand rules. At this point, this law implies that:
- Rule of demand: the higher the price of an FX currency, the fewer the demand. In contrast, the lower the price of an FX currency pair, the higher the demand.
- Rule of supply: the higher the price of an FX currency, the higher the supply. Conversely, the lower the price of an FX currency pair, the lower the supply.
Hence, we can conclude that the price movements, either up or down, will affect the market equilibrium. To explain further, if prices rise, then sellers (bears) will show up. When prices drop, we will see buyers (bulls).
How to trade with Smart Money ?
By applying the same logic to our main approach “smart money concepts Forex”, we will understand that the market makers (big players) try to create similar conditions. In a way, by buying aggressively to remove the floating supply of a currency, they will put the market on that FX in a phase of accumulation. Thus, smart money traders will be able to move the market whenever they want.
For instance, when the Forex market conditions seem favorable. The Forex smart money traders can then increase the price of the underlying currency at some time in the future. At a certain level, smart money investors will start to make profits by taking advantage of the higher prices and beginning to sell the currency back to the retail traders (uninformed ones).
In order to have a higher opportunity of achieving profitable trades and taking advantage of smart money, retail traders should align their way of thinking and trading with those institutional investors.
Smart money trading strategy
A smart money trading strategy is a simple system that tends to keep traders updated about the general market conditions. It aims also to focus on the relationship between retail and institution investments.
As we stated earlier, smart money refers to the capital that banks and financial institutions control. Thus, many investors build their own strategies depending on this concept. So, in order to understand and measure the performance of these capitals compared to the investments of retail traders. We can use the “smart money index”. Usually, the market makers such as central banks and financial institutions tend to use their sheer size to impact the market. Yet, this condition does not imply that the forex markets are immoral or that the top players have somehow gained inside knowledge over retail traders.
Smart Money Index
In fact, we can use the smart money index to evaluate the performance of institutions investments in the Forex market relative to the money invested by retail traders (known as “dumb money”). Commonly, institutional investors take positions throughout every hour of every trading day. In contrast, retail investors trade at the beginning of the trading day, reacting to the morning or overnight news. Nonetheless, we can use the smart money index in two ways:
Confirmation of currency pair trend
The smart money index does not show when to trade in the currencies. Rather, it reveals what a trader can expect from the FX currency in a short period. For instance, if there is an up tendency in an FX pair, the index can warn when the movement will change.
Variations in the SMI and the market tendency
Forex traders can look for oppositeness between the smart money index and the current trend of the market. Consequently, we will be in divergence conditions. In this regard, if a currency pair’s price moves down while the smart money index goes up, it usually signals an upcoming upward tendency. Conversely, if the FX currency pair’s price heads up and the SMI moves is dropping. Then, it signals a future downtrend. The image below displays the divergence on the smart money Index.
Smart money concepts Forex seems a little bit complicated for many retail traders. For this reason, it is used mostly by big institutions. In effect, by making large positions, smart money traders can control the market and then creates their own profitable circumstances. However, those orders cannot be unseen and retail traders can take advantage of them by trading with smart money. This means you have to buy if they are buying and shorten your position if they are selling.