SMS Trading Strategy is a forex trading method that aims to follow the moves of the “smart money” or the large financial institutions that have the power to manipulate the market. This strategy is based on the theory developed by Michael J. Huddleston, also known as The Inner Circle Trader (ICT), called Smart Money Concepts (SMS).
According to SMS theory, smart money creates liquidity in the market by inducing retail traders to enter or exit trades at certain price levels, and then exploiting their stop losses and take profits. To identify these price levels and trade accordingly, SMS traders use various concepts and terminology.
One of the key concepts used by SMS traders is order blocks. These are areas of supply and demand where smart money has accumulated their orders. They are marked by an impulsive move that breaks a high or low, leaves imbalance, or induces other traders to enter the market. Order blocks can act as support or resistance zones, depending on the direction of the impulsive move.
Another important concept is liquidity. Smart money needs liquidity to execute their large orders, so they often move price to areas where there are many orders from retail traders, such as stop losses and take profits. These areas are also called liquidity pools or liquidity grabs.
SMS traders also pay attention to mitigation blocks, which are areas where smart money has partially closed their positions or hedged their risk. These blocks are marked by a small retracement or consolidation after an impulsive move. Mitigation blocks can act as continuation signals or reversal signals, depending on the context of the market structure.
To analyze the market structure, SMS traders use various tools and indicators such as trend lines, Fibonacci retracements, pivot points, moving averages, and candlestick patterns. They also rely on price action and volume analysis to confirm their entries and exits.
It’s important to note that SMS Trading Strategy is not a fixed set of rules, but rather a flexible and adaptable approach that requires constant learning and practice.
What is SMS Trading Strategy
The SMS Trading Strategy is a forex trading approach rooted in the Smart Money Concepts (SMS). According to this philosophy, big financial institutions, like banks and hedge funds, dubbed the “smart money,” control the market by creating liquidity, triggering retail traders, and setting up stop losses. SMS traders strive to mirror the smart money’s order flow and market structure, taking advantage of its power and influence.
SMS traders need to perform thorough analysis and collect data to detect the order flow and market structure of the smart money. They rely on several tools, such as candlestick patterns, trend lines, Fibonacci tools, volume indicators, and market sentiment indicators to validate their bias and entry points. Due to its complexity, the SMS trading strategy requires SMS traders to possess ample patience and discipline as they wait for the ideal conditions and signals to enter the market.
This program provides some free resources and paid forex mentorship services. ICT’s founder, based on his experience and research on how the smart money functions in the forex market, claims to have developed the SMS trading strategy. The program enjoys a considerable following of traders who apply ICT’s methods and teachings to trade forex through the SMS trading strategy.
Basic Terms Used in SMS Trading Strategy
Smart Money Concepts (SMC): At the core of the SMS Trading Strategy lies the Smart Money Concepts (SMC) philosophy, which assumes that large financial institutions like banks and hedge funds manipulate the forex market. Known as the “smart money,” these institutions leave footprints in the market that SMC traders aim to follow. This means aligning with their order flow and market structure to increase their chances of success.
Order flow: To do this, SMS traders use order flow analysis to determine the direction and strength of price movements. By tracking the movement of buy and sell orders in the market, they can identify where the smart money is entering and exiting the market, and where they are likely to create liquidity or run stops.
Market structure: Market structure analysis is another crucial tool used by SMS traders. By looking at the arrangement of highs and lows in the market, they can define the trend and the phases of the market, such as accumulation, distribution, markup, and markdown. This helps them identify where the smart money is creating order blocks, mitigation blocks, and liquidity pools.
Order blocks: Order blocks are areas of price where the smart money has accumulated their orders, either to buy or sell. These zones can act as support or resistance zones, depending on whether they are bullish or bearish. They are usually formed by an impulsive move that breaks a high or low, leaves an imbalance, or induces other traders.
Liquidity: Liquidity, on the other hand, refers to the availability of buyers and sellers in the market. The smart money needs liquidity to execute their large orders, so they often manipulate price to create liquidity in areas where they want to enter or exit the market. Liquidity can be found in places where retail traders have set their stop losses or take profits, or where there are psychological levels, such as round numbers or Fibonacci retracements.
Mitigation blocks: Mitigation blocks are areas of price where the smart money has mitigated their risk by closing some of their positions or hedging them. These zones are usually formed by a small retracement or consolidation after an impulsive move and can act as continuation signals, indicating that the smart money is still in control of the market direction.
When you master these concepts and incorporating them into their trading strategies, SMS traders can increase their chances of success in the forex market.
How to Trade Using the SMS Trading Strategy
The SMS Trading Strategy operates on the premise that those with insider knowledge possess a distinct plan and trajectory for the market, allowing individual traders to benefit from their guidance. This approach relies on a range of tools and indicators, including trend lines, Fibonacci retracements, pivot points, moving averages, and candlestick patterns, in order to scrutinize market structures. In addition, the SMS traders utilize volume analysis and price action to verify their entries and exits. Far from a rigid rulebook, the SMS Trading Strategy represents a flexible and adaptive framework, necessitating ongoing education and application.
Step 1: Identify the market bias
To successfully implement the SMS Trading Strategy, the first step is to identify the market bias. This refers to the overall direction that smart money wants to move the price. There are several methods you can use to determine the market bias.
One approach is to analyze higher time frames, such as daily or weekly charts. By doing so, you can identify the dominant trend and major support and resistance levels. Additionally, you can use moving averages like the 200 SMA or 50 EMA to determine if the price is above or below them.
Another method is to analyze the market structure on lower time frames, such as 4-hour or 1-hour charts. Look for patterns of higher highs and higher lows (indicating an uptrend) or lower highs and lower lows (indicating a downtrend). You can also use trend lines or channels to connect these swing points and see if the price respects them.
Fibonacci analysis is another useful tool. You can utilize Fibonacci retracement tools to measure the retracement levels of previous impulsive moves. Additionally, Fibonacci extension tools can help project potential targets for future impulsive moves. Common Fibonacci levels used by SMS traders include 38.2%, 50%, 61.8%, 78.6%, 127.2%, and 161.8%.
Once you have identified the market bias, it’s important to trade in alignment with it. For example, if the market bias is bullish, focus on finding buying opportunities.
Step 2: Identify order blocks
The next step is to identify order blocks on your trading time frame, which is usually lower than your higher time frame analysis. Order blocks are areas where smart money has placed their orders and where they will likely manipulate price.
To identify order blocks, you need to look for specific characteristics. First, look for an impulsive move that breaks a high or low. This indicates a strong move in one direction. Next, look for a candlestick with a large body and small wicks. This shows that there was significant buying or selling pressure during that period.
Additionally, look for a candlestick that closes near its high for bullish order blocks or near its low for bearish order blocks. This indicates that buyers or sellers were in control at that level. Another characteristic to look for is a candlestick that leaves imbalance behind, meaning there is a gap between its wick and the previous candle’s wick. This suggests that there was a significant shift in supply and demand.
Lastly, look for a candlestick that induces other traders to enter the market in the opposite direction of the impulsive move. This is a sign that smart money is manipulating the price to trap other traders.
Once you have identified these order blocks, you can mark them on your chart using horizontal lines or rectangles. You can also label them as bullish order blocks (BOB) or bearish order blocks (BEB).
Step 3: Identify liquidity pools
After identifying order blocks, the next step in implementing the SMS Trading Strategy is to identify liquidity pools on your trading time frame. Liquidity pools are areas where smart money is likely to move price in order to fill their orders and trigger other traders’ stop losses and take profits. These pools are typically found above or below order blocks, swing highs or lows, or round numbers.
To identify liquidity pools, there are several characteristics to look for. First, look for areas where price has not been for a while. This indicates a lack of recent trading activity and the potential for a liquidity pool. Additionally, look for areas where price has reversed sharply in the past, as this suggests the presence of significant liquidity.
Consolidation or range formations also indicate the presence of liquidity pools. These areas represent a period of indecision in the market and can attract smart money looking to manipulate price. Finally, patterns such as triangles, wedges, or flags can also indicate the presence of liquidity pools.
Once you have identified these liquidity pools, you can mark them on your chart using horizontal lines or rectangles. It can be helpful to label them as liquidity grabs (LG) or liquidity runs (LR) for easy reference.
For example, on a 15-minute chart of EUR/USD, you may identify multiple liquidity pools. These pools could be located above or below order blocks and may have triggered stop losses and take profits for other traders. By recognizing these liquidity pools, you can gain insight into the intentions of smart money and make more informed trading decisions.
Step 4: Identify mitigation blocks
Mitigation blocks play a crucial role in the SMS Trading Strategy. These blocks are areas where smart money has partially closed their positions or hedged their risk, indicating their preparation for the next move. Mitigation blocks are typically found near order blocks or liquidity pools.
To identify mitigation blocks, there are specific characteristics to look for. First, observe a small retracement or consolidation after an impulsive move. This indicates a potential mitigation block. Additionally, look for candlesticks with small bodies and large wicks, as well as candlesticks that close near their open (for bullish mitigation blocks) or near their close (for bearish mitigation blocks). These candlestick patterns suggest indecision or rejection in the market, which can be indicative of mitigation blocks.
Once you have identified these mitigation blocks, mark them on your chart using horizontal lines or rectangles. It can be helpful to label them as bullish mitigation blocks (BMB) or bearish mitigation blocks (BMB) for easy reference.
For example, on a 15-minute chart of EUR/USD, you may identify multiple mitigation blocks. These blocks could be located near order blocks or liquidity pools and may exhibit characteristics of indecision or rejection.
Step 5: Enter and exit trades
Now that you have identified the market bias, order blocks, liquidity pools, and mitigation blocks, it’s time to enter and exit trades based on these concepts. There are different entry methods you can use in the SMS Trading Strategy.
One entry method is the “Change of character” (CHOCH). This occurs when price behavior shifts after reaching an order block, liquidity pool, or mitigation block. For example, if price reaches a bullish order block (BOB) and then sharply falls, it indicates a change from bullish to bearish. In this case, you can enter a short trade when price breaks below the low of the CHOCH candlestick.
Another entry method is the aggressive entry. This involves entering a trade as soon as price reaches an order block, liquidity pool, or mitigation block, without waiting for confirmation. For instance, if price reaches a BOB, you can enter a long trade at the open of the next candlestick.
Alternatively, you can opt for a conservative entry. This means entering a trade after price confirms an order block, liquidity pool, or mitigation block with another concept or term. For example, if price reaches a BOB and then forms a bullish mitigation block (BMB), you can enter a long trade when price breaks above the high of the BMB.
When it comes to exiting trades, one method is to use the risk-reward ratio. This involves setting your take profit based on the ratio between your potential profit and potential loss. For instance, if you have a risk-reward ratio of 2:1, it means that for every $1 you risk, you expect to make $2 in profit.
SMS Trading Strategy PDF
The SMS trading strategy PDF contain the comprehensive method for analyzing the forex market. The study of price behavior and reactions to various chart levels and patterns is known as price action. Market structure encompasses how price forms highs and lows, trends, ranges, and breaks. Employing these concepts allows for the identification of where smart money is likely to move price, how to identify their footprints and clues on the chart, and how to trade with them rather than against them. Additionally, this strategy employs supply and demand zones, liquidity pools, candlestick patterns, trend lines, and other tools to improve analysis and entry points.
This PDF guide provides an introductory overview of smart money concepts, a comprehensive explanation of order blocks, price action, and market structure, as well as several examples of how to apply the SMS trading strategy in diverse scenarios. Upon completing the guide, you will have a greater comprehension of how the forex market operates, and how the SMS trading strategy can improve your trading performance. You can view and read the PDF below.
SMS Trading StrategyConclusion
SMS trading strategy will greatly help you master the act of trading and with this knowledge you can easily predict the market so to know when you should start your trading ad when you should stop trading because this is the key thing in trading.
