Complete Guide to Smart Trading: What is Smart Money and How to Get Started?

The Concept of Smart Money in Trading

The smart money strategy is a method of analyzing the behavior of large capital in the market. It is applied across all financial markets, including the stock, currency, and cryptocurrency.

Large players with significant resources can influence asset pricing in their favor. The essence of the concept is that there are large and small participants in the market. A large player always acts against the expectations of the crowd, using the emotions of small traders to move the market in the desired direction.

Difference from classical technical analysis

Smart money is based on candlestick analysis and allows you to look at the market from a different angle. Typically, small participants use classic patterns that often do not work.

A major player understands the psychology of the crowd and deliberately shapes expected patterns. As a result, most small participants lose their assets. Classic technical analysis provides opportunities for manipulation by large players.

Market Structures

The market moves in three main structures: ascending (bullish trend), descending (bearish trend), and sideways (flat). Defining the current structure is fundamental for analysis and making trading decisions. The trend can be short-term, medium-term, or long-term, and its correct identification is critically important for successful trading.

Key Turning Points

Swing points mark moments of price reversal in the market. There are Swing highs indicating price reversals downward, and Swing lows signaling reversals upward. A break of market structure occurs when key levels within a trend are updated, and a change in the nature of price movement indicates a shift in the market's trend direction.

Liquidity and Imbalance

Liquidity is a central element of smart money strategy and serves as a sort of "fuel" for large players, allowing them to manipulate the market. Imbalance arises from a significant discrepancy between buy and sell orders and is visually manifested on the chart as a long impulse candle.

Order Blocks and Divergences

An order block indicates a zone on the chart where a significant volume was traded by a large player. Bullish and bearish order blocks are distinguished, defining potential areas of interest for smart money. Divergence reflects the discrepancy between the direction of price movement and the readings of a technical indicator, which often serves as a signal for an upcoming market reversal.

Understanding these concepts helps to identify the actions of major players and make more effective trading decisions.