Smart Money Concepts (SMC) Methodology — The Institutional Mindset 🏛️

Your Trade:

Account: $10,000
Want to buy: 0.5 lots EUR/USD
Click "Buy Market"
Filled instantly at 1.0900.1
Slippage: 0.1 pips
Cost: Negligible
**Easy, instant, no market impact**

Bank's Trade:

Account: $5 billion
Want to buy: 50,000 lots EUR/USD (5 BILLION USD!)
If they click "Buy Market"...

Disaster:
- Available at 1.0900: 500 lots
- Available at 1.0901: 300 lots
- Available at 1.0902: 200 lots
- ...continuing to fill at worse prices...
- Final fills at 1.0935-1.0940
- Average fill: 1.0918
- Slippage: 18 pips
- Cost: $90 MILLION in slippage
- **Completely unacceptable**

The Institution's Solution:

They can't just "buy." They must:

• Find WHERE liquidity exists (retail Stop Losses)
• Engineer price to THOSE levels
• ABSORB the liquidity as retail stops trigger
• Fill their massive order at optimal prices
• This is what SMC studies

Order Flow Definition:

"Order Flow is the sequencing and execution of large institutional buy and sell orders. It's the ACTUAL transactional pressure moving price, not technical patterns or indicators."

The Difference:

Indicators (Lagging):

RSI shows: "Overbought at 75"
What it means: Price HAS moved up a lot recently
When you know: AFTER the move happened
**Reactive, not predictive**

Order Flow (Leading):

SMC shows: "BSL pool at 1.1000, displacement created OB at 1.0995-1.1005"
What it means: Institution SOLD at 1.1000 (documented footprint)
When you know: AS the move happens (or immediately after)
What comes next: Price will return to OB, institution will defend
**Proactive, predictive**

The Three Phases of Institutional Order Flow:

Phase 1: Accumulation (The Setup)

Institution wants to BUY 2 billion EUR
Current price: 1.0920

Problem: Not enough sellers at 1.0920

Solution:
- SELL aggressively to push price DOWN
- Target: 1.0890 (where retail SLs cluster)
- Sweep SSL at 1.0890
- **Creates sell-side liquidity**

Phase 2: Execution (The Order Block)

Price at 1.0890:
- Retail Stop Losses trigger (become sell orders)
- Institution BUYS from those sell orders
- Fills 600M EUR at 1.0890-1.0895
- **Order Block created at 1.0890-1.0895**
- Leaves 1.4B in PENDING buy orders at this zone

Phase 3: Displacement (The Impulse)

After accumulation:
- Institution stops selling pressure
- Natural buyers + institutional momentum
- Price EXPLODES from 1.0890 to 1.0950 (60-pip impulse)
- Creates Fair Value Gap (FVG)
- Breaks Market Structure (BOS/MSS)
- **This is the move you want to catch**

Phase 4: Mitigation (Your Entry)

Price at 1.0950, pulls back:
- Retraces to Order Block at 1.0890
- Institution's 1.4B pending buy orders ACTIVATE
- Price bounces from OB
- **You enter here, riding institutional buying to 1.1000+**

The SMC Framework:

Everything in SMC revolves around tracking these four phases:

• Identify WHERE accumulation will happen (liquidity pools)
• Confirm accumulation happened (Order Block forms)
• Wait for displacement (BOS/MSS confirms)
• Execute on mitigation (trade the pullback to OB/FVG)
• You're reading institutional behavior, not predicting random price

Buy-Side Liquidity (BSL):

Location:

• ABOVE swing highs
• ABOVE obvious resistance levels
• ABOVE equal highs
• ABOVE round numbers

What's There:

• Stop Losses from SHORT traders
• Buy Stop orders from breakout traders
• Cluster of BUY orders

When Swept:

• Triggers massive buying
• Institutions use this to SELL (counterparty)

Visual:

1.1010 ╔═══════════╗ ← BSL Pool (retail stops above)
1.1005 ║           ║
1.1000 ╚═══════════╝ ← Resistance (swing high)
1.0995 ─────────────
1.0990 ─────────────

Sweep:
Price spikes to 1.1008 (grabs BSL)
Institution SELLS into the buy orders
Reverses DOWN

Sell-Side Liquidity (SSL):

Location:

• BELOW swing lows
• BELOW obvious support levels
• BELOW equal lows
• BELOW round numbers

What's There:

• Stop Losses from LONG traders
• Sell Stop orders from breakdown traders
• Cluster of SELL orders

When Swept:

• Triggers massive selling
• Institutions use this to BUY (counterparty)

Visual:

1.0910 ─────────────
1.0905 ─────────────
1.0900 ╔═══════════╗ ← Support (swing low)
1.0895 ║           ║
1.0890 ╚═══════════╝ ← SSL Pool (retail stops below)

Sweep:
Price drops to 1.0892 (grabs SSL)
Institution BUYS from the sell orders
Reverses UP

Common Liquidity Pool Locations:

Your Monday Routine:

• Mark previous week high/low
• Mark equal highs/lows
• Mark major round numbers
• These are your liquidity targets for the week

What is Inducement?

"Inducement is a deliberate, small price movement designed to lure retail traders into taking positions, creating a fresh cluster of Stop Losses that institutions can later sweep."

The Inducement Process:

Step 1: Set the Stage

EUR/USD consolidating 1.0900-1.0950
Retail waiting for "the move"
No clear direction yet

Step 2: The Inducement Move

Price breaks ABOVE 1.0950 (resistance)
Reaches 1.0960
Looks like "bullish breakout!"

Retail reaction:
- "Breakout confirmed! Buy!"
- Entries at 1.0955-1.0960
- Stop Losses at 1.0945 (below breakout)
- **Retail is now LONG with SLs clustered**

Step 3: The Reversal (Real Move)

Price at 1.0960
Institution SELLS aggressively
Price reverses BELOW 1.0950
Drops to 1.0940 (sweeps retail SL at 1.0945)
**Continues to 1.0850**

Result:
- Retail bought at 1.0955, stopped at 1.0945 (-10 pips)
- Institution sold at 1.0955-1.0960 (to retail buyers)
- Institution covers at 1.0850 (+110 pips)
- **Retail was the counterparty**

Step 4: The Mitigation

Price at 1.0850
Pulls back to 1.0945-1.0955 (Bearish OB zone)
**SMC trader enters SHORT here**
Catches the continuation to 1.0750
+95 pips

Visual Diagram:

Inducement Pattern:

1.0960 ────┐ ← Inducement (fake breakout)
           │ Retail: "Buy!"
1.0950 ════╪════ Resistance
           │
1.0940 ────┘
           ↓ REVERSAL
1.0930 ─────────
1.0920 ─────────
1.0910 ─────────
1.0900 ─────────
           ↓ Real move down
1.0850 ←──────── Institution's target

Retail trapped at highs
Institution shorted the highs

The Lesson:

First breakout = often fake (inducement)
Reversal from "obvious" level = often real
Don't be the liquidity. Wait for the trap to spring.

What is a Stop Hunt?

"A stop hunt (liquidity sweep) is when price briefly pierces a known liquidity pool to trigger Stop Losses, then IMMEDIATELY reverses. The wick grabs liquidity; the close shows the real intent."

Anatomy of a Stop Hunt:

Setup:

Support at 1.0900 (tested 3 times)
Retail traders long with SL at 1.0895
= SSL Pool below 1.0900

The Sweep:

Candle formation:
Open: 1.0905
High: 1.0908
Low: 1.0888 ← WICK sweeps to 1.0888 (below 1.0895 SSL)
Close: 1.0906 ← CLOSES back above support!

What happened:
- Wick grabbed all retail SLs (1.0895-1.0898 zone)
- Retail forced to sell (their SL = sell order)
- Institution BOUGHT from those sell orders
- Immediately reversed UP (no more selling pressure)
- **Stop hunt complete**

Next Move:

After sweep candle (closed 1.0906):
Next candle: 1.0906 → 1.0925 (strong bullish)
Next: 1.0925 → 1.0945
**Rally continues to 1.0980+**

Retail: Stopped out at 1.0895, missed the rally
Institution: Bought at 1.0890-1.0895, riding to 1.0980
**90-pip difference in performance**

How to Identify Stop Hunts:

Characteristic 1: The Wick

Long wick beyond the level
Proportionally larger than the body
**Shows aggressive push then rejection**

Characteristic 2: The Close

Closes BACK INSIDE the previous range
Doesn't stay beyond the level
**Shows it was temporary liquidity grab**

Characteristic 3: Immediate Reversal

Next 1-3 candles move OPPOSITE to sweep
Strong momentum away from swept level
**Confirms the hunt was for entry, not continuation**

Stop Hunt vs. Real Break:

Stop Hunt (Reversal):

- Wick: 20 pips beyond support
- Close: 8 pips ABOVE support
- Next candles: Rally up
= REVERSAL (trade long)

Real Break (Continuation):

- Break: 20 pips beyond support
- Close: 15 pips BELOW support
- Next candles: Continue down
= CONTINUATION (trade short)

"The wick is the lie. The close is the truth."

Definition:

"An Order Block is the final candle(s) in one direction BEFORE an explosive move in the opposite direction. It represents where institutions accumulated or distributed their positions before displacement."

Bullish Order Block (For BUYING):

Pattern:

Downtrend or pullback:
Candle A: Bearish
Candle B: Bearish
Candle C: Bearish (FINAL down) ← This is the Bullish OB
Candle D: EXPLOSIVE bullish (displacement)

Bullish OB = Candle C

What It Means:

• During Candle C, institution was BUYING
• Absorbed all the selling pressure
• Filled initial position
• Left PENDING buy orders for more
• When price returns to Candle C zone, pending orders activate

Visual:

1.0920 ─────────── Candle D (displacement up)
1.0910 ─────────── 
1.0900 ═══════════ OB High (Candle C wick)
1.0895 ─────────── 50% OB ← Entry target
1.0890 ═══════════ OB Low (Candle C wick)
         ↑
    When price returns here = BUY

Bearish Order Block (For SELLING):

Pattern:

Uptrend or rally:
Candle A: Bullish
Candle B: Bullish
Candle C: Bullish (FINAL up) ← This is the Bearish OB
Candle D: EXPLOSIVE bearish (displacement)

Bearish OB = Candle C

What It Means:

• During Candle C, institution was SELLING
• Absorbed all the buying pressure
• Filled initial position
• Left PENDING sell orders for more
• When price returns, pending orders activate

Visual:

1.1010 ═══════════ OB High (Candle C wick)
         ↓
1.1005 ─────────── 50% OB ← Entry target
1.1000 ═══════════ OB Low (Candle C wick)
1.0990 ─────────── Candle D (displacement down)

When price returns here = SELL

Step-by-Step Process:

Step 1: Find Explosive Moves

Look for candles that:
- Moved 30+ pips (H4/Daily)
- Broke previous structure
- Created visible gap
**These are displacements**

Step 2: Look BEFORE the Explosion

What's the candle immediately BEFORE the explosion?

Bullish explosion? → Look at the final DOWN candle
Bearish explosion? → Look at the final UP candle
**That's your Order Block candidate**

Step 3: Validate with Sweep

Does the OB candle:
- Wick below support (bullish OB)?
- Wick above resistance (bearish OB)?

If YES: High-quality OB ✅
If NO: Still valid, lower quality ⚠️

Step 4: Check for FVG

Did the displacement create a Fair Value Gap?
Gap between candle wicks?

If YES: Confirms explosive institutional flow ✅
If NO: Weaker displacement ⚠️

Step 5: Mark and Wait

Draw box from OB wick low to wick high
Mark 50% midpoint
Set alert for price return
**Wait for mitigation, don't chase**

Practice Example:

GBP/USD H4 Chart:

Observation:

Price at 1.2500, suddenly explodes to 1.2580 (80-pip candle)

Step 1: Found explosive move ✅
Step 2: Look before it
  - Previous candle: Bearish 1.2505-1.2495
  - This is BEFORE the explosion ✅
Step 3: Check for sweep
  - Wick low: 1.2492 (swept below 1.2500 support) ✅
Step 4: Check for FVG
  - Gap from 1.2505 to 1.2520 (15 pips) ✅
Step 5: Mark it
  - OB: 1.2492-1.2505
  - 50%: 1.2498.5
  - Alert set for 1.2498
  **Valid high-quality Bullish OB**

Trade It:

Week later, price pulls back to 1.2500
Entry: 1.2499 (OB 50%)
SL: 1.2487 (below OB)
Risk: 12 pips
Target: 1.2580 (previous high)
Reward: 81 pips
R:R: 1:6.75
**Textbook OB trade**

Break of Structure (BOS) = Continuation:

In Uptrend:

Structure: HL → HH → HL2 → HH2
If price breaks ABOVE HH2:
= BOS (uptrend strengthening)
**Trade: Long on pullback to new HL3**

In Downtrend:

Structure: LH → LL → LH2 → LL2
If price breaks BELOW LL2:
= BOS (downtrend strengthening)
**Trade: Short on rally to new LH3**

Signal: "Trend is strong, continue trading with it"

Market Structure Shift (MSS) = Reversal:

In Uptrend (Bullish → Bearish):

Structure: HL → HH → HL2 → HH2
If price breaks BELOW HL2:
= MSS (uptrend FAILED)
**Trade: Short on pullback to Bearish OB**

In Downtrend (Bearish → Bullish):

Structure: LH → LL → LH2 → LL2
If price breaks ABOVE LH2:
= MSS (downtrend FAILED)
**Trade: Long on pullback to Bullish OB**

Signal: "Trend is broken, prepare for reversal"

Decision Matrix:

Current Trend: UPTREND
    ↓
Price Action:
    ↓
Broke ABOVE recent HH?
    ↓ YES → BOS (continuation)
           → Trade: Long on pullback
    ↓ NO
Broke BELOW recent HL?
    ↓ YES → MSS (reversal)
           → Trade: Short on pullback
    ↓ NO
        → Still in trend, wait

Scenario: Uptrend into MSS

Phase 1: Uptrend (Trade with BOS)

Structure: HL at 1.0800, HH at 1.0900, HL2 at 1.0850

BOS occurs:
- Price breaks above 1.0900
- Creates HH2 at 1.0950
- **Uptrend confirmed, trade long**

Trade:
- Wait for pullback to Bullish OB near HL2
- Enter long at 1.0860
- Target next HH

Phase 2: MSS Signal (Prepare for Reversal)

After HH2 at 1.0950:
Price pulls back to 1.0900
Then BREAKS BELOW HL2 at 1.0850
Closes at 1.0830
**MSS CONFIRMED**

Analysis:
- Uptrend structure broken
- HL2 (defending low) violated
- Trend has FAILED
- **Flip bias to bearish**

Phase 3: Find the OB

Look at the candles BEFORE the MSS break:
Final bullish candle: 1.0845-1.0860
**This is your Bearish Order Block**

Also created:
- FVG from 1.0860 to 1.0840 (20-pip gap)

Phase 4: Wait for Mitigation

Price continues down to 1.0780
Then rallies back (pullback)
Reaches 1.0855 (enters Bearish OB zone)
**ENTRY SIGNAL**

Phase 5: Execute

Entry: 1.0852 (OB 50%)
SL: 1.0865 (above OB high)
Risk: 13 pips

Targets:
T1: 1.0780 (recent low)
R:R: 1:5.54
T2: 1.0700 (major support)
R:R: 1:11.69

Result:
Price respects OB, drops to 1.0775
+77 pips from MSS reversal trade

The Power:

From uptrend → caught the EXACT reversal point → traded the new downtrend
All from reading structure (MSS) + footprint (OB)
No indicators, just institutional flow

Definition:

"A Fair Value Gap is created when price displaces so aggressively that a GAP forms between the wick of the 1st candle and the wick of the 3rd candle (skipping the 2nd). This represents one-sided order flow—an imbalance the market will often correct."

Bullish FVG (Upward Imbalance):

Pattern:

Three consecutive candles moving UP:
Candle 1: High at 1.0910
Candle 2: Explosive (middle candle)
Candle 3: Low at 1.0925

Check:
Does 1.0910 (C1 high) overlap with 1.0925 (C3 low)?
NO! Gap = 15 pips

FVG = 1.0910 to 1.0925
**This zone had NO balanced trading (only buying)**

Visual:

1.0940 ─── C3
1.0930 ───
1.0925 ═══ C3 Low (FVG lower boundary)
    ║
    ║ GAP (imbalance - no trading here)
    ║
1.0910 ═══ C1 High (FVG upper boundary)
1.0900 ─── C1

Trading Implication:

Price often RETURNS to FVG to "rebalance"
When it does:
- 50% of FVG (1.0917.5) acts as support
- Institution may defend this level
- **Potential bounce/entry zone**

Bearish FVG (Downward Imbalance):

Pattern:

Three consecutive candles moving DOWN:
Candle 1: Low at 1.1000
Candle 2: Explosive (middle)
Candle 3: High at 1.0985

Check:
Does 1.1000 (C1 low) overlap with 1.0985 (C3 high)?
NO! Gap = 15 pips

FVG = 1.0985 to 1.1000
**One-sided selling, no balanced trade**

Trading Implication:

Price returns to FVG:
- 50% (1.0992.5) acts as resistance
- Potential rejection/short entry

Why FVGs Matter:

The Institutional Reality:

Institution's 2B buy order:
- Created explosive upward displacement
- Left FVG behind (gap in delivery)
- Couldn't fill ENTIRE order during spike
- Left PENDING orders in the gap
- **Price returns to fill those orders**

Your Edge:

FVG = IOU from the market
Price WILL likely return (70-80% mitigation rate)
When it does, 50% level is magnetic
**Predictable rebalancing = trading opportunity**

The A+ Setup (Triple Confluence):

Components:

• ✅ Liquidity Sweep (stop hunt confirmed)
• ✅ Order Block (institutional footprint)
• ✅ Fair Value Gap (imbalance confirmed)
• ✅ Market Structure (BOS or MSS alignment)

Example:

Bullish Setup:

1. Swept SSL below 1.0900 ✅ (liquidity grab)
2. Created Bullish OB at 1.0888-1.0898 ✅ (footprint)
3. Left FVG from 1.0898-1.0920 ✅ (imbalance)
4. Caused MSS above 1.0930 ✅ (structure shift)

When price returns to OB at 1.0893:
= QUADRUPLE CONFLUENCE
= 75-85% win rate potential
**Maximum conviction trade**

The B Setup (Double Confluence):

Components:

• ✅ Order Block
• ✅ FVG OR Sweep
• ⚠️ Missing one component

Still tradable:

• 60-70% win rate
• Full 1% risk acceptable
• Good setup

The C Setup (Single Element):

Components:

• ✅ Order Block only
• ❌ No FVG
• ❌ No sweep
• ❌ Weak structure

Lower probability:

• 50-55% win rate
• Reduce risk to 0.5%
• Or skip entirely

The Professional Standard:

"Only trade A+ and B setups. Be patient. Confluence is the difference between gambling and trading with edge."

Monthly Stats:

• A+ setups: 3-5 per month (rare)
• B setups: 10-15 per month (regular)
• C setups: 30+ per month (common, mostly skip)

Focus on quality, not quantity.