Understanding the Smart Money Concept in Forex Trading

Raed Nazir Ahmed
Mar 27
5 min read

The Smart Money Concept (SMC) isn’t merely a trading strategy; it’s a core philosophy about market participation. It centers on aligning with major market players to boost the likelihood of profit. This approach appeals to both seasoned and new traders and is particularly favored by those who prefer to select financial instruments with care rather than randomly purchasing currency.

What Is the SMC in Forex Trading?

The term “Smart Money” comes from traditional financial market language. It refers to the investments made by large institutional players, such as hedge funds and pension funds. The concept was popularized by modern trader Michael Huddleston, known by many as the 'Inner Circle Trader' or 'ICT'. Huddleston is an advocate of various market conspiracy theories, believing that the so-called 'Smart Money'—acting as the main market makers—actively seeks funds from both small retail traders and larger participants who are not influencing asset prices. According to him, any trader who grasps the movements of these major players can align their own trading decisions accordingly to generate profits.

Many of Huddleston’s videos explain the Smart Money Concept, its terminology, and its practical application. While most of his material is available for free, he also offers paid education on trading within the SMC framework. He claims that the revenue from his students has even surpassed his own trading income.

Core Elements of the SMC Trading Strategy

Several fundamental principles underlie the Smart Money system:

Trend Analysis and Consolidation

In bullish markets, successive highs and lows climb, while in bearish markets, they decline. When a new low in an uptrend (or a new high in a downtrend) overlaps the previous one, it signals a break in the trend structure and often points to a consolidation phase or trading range.

Liquidity as a Market Driver

Within this framework, market participants other than the Smart Money are viewed as liquidity providers. Support and resistance levels become zones where substantial buying or selling interest is concentrated. Traders typically set stop orders (Buy Stop and Sell Stop) near these levels to capture breakout movements, while also using stop-loss orders to manage risk. Smart Money targets these areas of high liquidity to execute large orders without moving the market drastically, particularly in sideways or weak trending markets.

Identifying Liquidity Levels

Marking liquidity on charts across various timeframes is considered essential. This includes analyzing market structures on higher timeframes to guide trading decisions on lower ones.

Market Gaps

Known as “imbalances” in the SMC framework, market gaps represent inefficiencies created when prices move rapidly. A Fair Value Gap (FVG), for example, is a void left by the imbalance between buyers and sellers. There is an expectation that the market will eventually retrace and “fill” these gaps to restore equilibrium.

Recognizing Market Patterns

Entry points are often determined by identifying specific patterns related to bullish or bearish trends. These include scenarios like a Breakout to Update Structure, Breakdown of Structure (BOS), Change of Character (CHoCH), Impulse Shift, and Order Block formations.

Notable price action patterns and market structures within SMC

Break of Structure (BOS)

This pattern suggests that the prevailing trend is likely to continue.

Fair Value Gaps (FVG)

These gaps are seen as indications of an imbalance where prices are expected to retrace to “fill” the gap.

Inversion Fair Value Gaps (IFVG)

These represent areas where an existing fair value gap becomes invalidated, signaling a potential shift in market momentum.

Change of Character (CHoCH)

A change in market structure that hints at a loss of trend momentum or a possible reversal.

These areas are also common zones for traders to set their stop-loss orders.

(1) Buy Side Liquidity (BSL)

(2) Sell Side Liquidity (SSL)

How the Smart Money Concept Operates

Some market observers argue that the Smart Money strategy is rooted in classic technical analysis and is, in essence, an evolved version of Price Action trading. What sets Huddleston’s approach apart is his focus on objectively assessing price behavior in real time, without relying on complex mathematical indicators.

The SMC integrates several well-known trading theories:

Detecting trends and flat (consolidation) periods.
Analyzing multiple timeframes where higher timeframe trends guide trading decisions on lower ones.
Trading around support and resistance levels by distinguishing between false and genuine breakouts.
Utilizing Price Action or candlestick patterns to time entries and exits effectively.

This approach is practical enough for beginners, offering a clear algorithm that can potentially lead to profitable trading outcomes.

Pros and Cons of the Smart Money Concept

The SMC has sparked considerable debate among traders. Critics argue that:

The concept lacks concrete evidence linking the observed patterns directly to manipulations by Smart Money.
Many of the principles were already described by early trading theorists, long before retail participation became significant.
Retail traders constitute a relatively small percentage of total market volume (around 20% on the US stock market), making them less likely targets for large institutional players as suggested by the theory.

Despite these criticisms, many traders recognize the practical benefits of the Smart Money approach. They note that:

Trading without indicators, based solely on price charts, speeds up decision-making and can lead to better profitability.
The systematic nature of the algorithm helps traders quickly understand market behavior and potential future moves.
While not groundbreaking, SMC effectively packages established Price Action principles into a coherent system that can yield steady returns when combined with sound risk and capital management strategies.

How to Trade Using the Smart Money Concept

Trading with SMC involves monitoring the actions of major financial institutions like banks and investment funds. Traders need to pinpoint the zones where these players are likely active and use both fundamental analysis and candlestick charts to confirm their suspicions.

A simplified trading algorithm based on the SMC includes:

Data Collection and Analysis:Review current market data and economic calendars.
Assessing Supply and Demand Imbalances:Identify areas that might attract Smart Money interest.
Volume Analysis:Monitor trade volumes to track the activities of major market players.
Candlestick Confirmation:Use candlestick patterns to validate potential trade setups.
Entry and Risk Management:Determine precise entry points and set pending orders, while placing stop-loss orders to protect against adverse market movements.

For instance, when trading an FVG strategy, the market tends to return to fill the gap created during a bearish trend, a behavior that can be anticipated by following Smart Money actions.

Understanding key market structure points—such as Swing lows and Swing highs (labeled as Higher Highs (HH), Lower Highs (LH), Higher Lows (HL), and Lower Lows (LL))—is crucial. The market’s structure can typically be categorized into three states:

Upward Movement: Successively higher highs and lows indicate upward capital flow.
Downward Movement: Consistently lower highs and lows suggest downward movement.
Consolidation: Similar highs and lows signal that major players might be accumulating or distributing assets, often preceding sharp market moves.

Final Thoughts

In essence, Smart Money refers to the capital managed by institutional investors like hedge funds and pension funds. The Smart Money Concept involves tracking these entities’ actions to anticipate market moves. Developed by Michael Huddleston, this strategy uses classic technical analysis tools, focusing on real-time price action rather than complex indicators.

While some traders question its originality or evidentiary basis, the SMC offers a practical trading framework. By analyzing major market players, tracking key structural points, and predicting trends, traders can potentially achieve consistent profits—even if the system doesn’t guarantee a win rate above 90%.