This article explores the Smart Money Concept (SMC), detailing how its principles can help investors transform their trading from ‘zero’ to ‘hero’ in the stock market, based on insights from practitioner Rajan Subedi.
In the stock market, many traders traditionally rely on price action, chart patterns, and support-resistance levels for their transactions. However, there has been growing interest recently in the Smart Money Concept (SMC). This approach focuses on understanding market price structure, liquidity, and the likely activities of institutional investors.
In a special podcast for ‘Bajarkochirfar,’ SMC practitioner Rajan Subedi discussed how the Smart Money Concept helps identify market trends, entry/exit points, and potential reversals. He explains that by studying structure mapping, order blocks, fair value gaps, liquidity, inducement, and change of character all together, one can better understand the market’s probable direction.
SMC vs. Traditional Price Action
With typical price action, investors usually buy when the price reaches a support area. But SMC goes beyond just checking if the price is at a support level. It tries to pinpoint areas where institutional investors likely have pending orders. For this, Subedi highlights the importance of focusing on regions that contain order blocks along with unmitigated fair value gaps. He suggests that if the price returns to such areas, it could indicate a high chance of institutional buying.
The term ‘unmitigated’ holds special significance in SMC. An area is considered unmitigated if an order block formed, and the price later returned to that area but has not yet ‘filled’ or touched it. Such zones are analyzed as potential areas where institutional investors still need to buy the amount of shares they want. When the price revisits such an area, it can create a buying opportunity, after which the price often moves upwards.
Understanding Key SMC Elements
According to Subedi, liquidity is a critical foundation in the Smart Money Concept. His strategy involves looking for entry opportunities only after the price has taken out liquidity around a previous low or high. Specifically, he advises observing sell-side liquidity (SSL) to identify buying potential and buy-side liquidity to identify selling or exit opportunities.
To understand market structure, Break of Structure (BOS) and Change of Character (CHoCH) are also crucial. Subedi explains that if the market breaks a previous high with a closing candle, it helps confirm a new structure. Similarly, when a significant low or high breaks against the existing market trend, it’s studied as a Change of Character, signalling a potential trend reversal. By mapping both internal and external structures this way, one can grasp the market’s direction.
Another important concept in SMC is the Fair Value Gap (FVG). This is studied as a bullish fair value gap if there is a gap between the high of the first candle and the low of the third candle among three consecutive candles. Such a gap is often viewed as a potential area where institutional orders have not yet been fully filled. Therefore, Subedi suggests that areas where both order blocks and fair value gaps are in an unmitigated state can be considered potential entry zones.
When a strong supply zone breaks, many retail investors often rush to buy, following the breakout. However, from an SMC perspective, Subedi stresses the need to also consider the possibility that institutional investors might use the liquidity present in that same area. He notes that after the market takes out the liquidity above a supply zone, it could reverse direction, suggesting that such areas should also be monitored for exit opportunities.
Inducement is another important concept in SMC. Subedi explains inducement as a situation where the market attracts retail investors in one direction, only to encourage them to trade in the opposite direction than expected. In an uptrend where continuous higher highs and higher lows are forming, this concept helps analyze the possibility of the market collecting more liquidity at a significant pullback low before continuing its main direction.
SMC in the Nepali Market
Subedi has stated that SMC concepts can be applied to chart analysis even in the Nepali stock market, NEPSE. He suggests using daily or one-hour timeframes for structure mapping and smaller timeframes for entry. However, he warns that smaller timeframes in the Nepali market often have more ‘noise’ and a higher chance of traps, so caution are advised.
Discussing the current market, Subedi mentioned that if a Change of Character/Market Structure Shift is observed, it’s important to consider the possibility that the market might come down again to grab liquidity. He advises that instead of immediately buying just because the price reaches a certain area, it’s better to look for entry only after accumulation or institutional-type candles/patterns form.
He suggested that tools like Fixed Range Volume Profile and VPVR can be useful to understand which stocks have ‘trapped’ smart money or where accumulation is happening, as strong rallies might not occur until institutional investors have collected enough shares.
Subedi’s argument concludes that the basic idea behind SMC is to identify potential institutional buying areas in demand zones and selling areas in supply zones. Therefore, instead of considering every support or breakout on a chart as a direct buy-sell signal, he recommends studying liquidity, structure, and order zones together.
AI Disclaimer: This article was originally published on https://bajarkochirfar.com. It has been translated with the help of AI. For the best understanding and accurate facts, we recommend reading the original Nepali version.
