TL;DR: Smart Money Concept Trading Strategy
Step 1: Identifying Market Trends
Step 2: Highlighting Supply and Demand Zones
Step 3: Identifying Order Blocks (OB) and Fair Value Gaps (FVG)
Step 4: Market Entry with Change of Character (ChoCh)

Why Trade with Smart Money Concept (SMC)

In today’s trading markets, institutional traders hold significant influence due to their substantial capital, which can sway the market in their favor. The smart money concept aims to align with institutional traders by entering and exiting the market with their money flow, capitalizing on the substantial market liquidity.

However, as institutional traders’ real-time orders are not immediately disclosed, we cannot rely on documentation, papers, or online news to copytrade. Instead, the SMC focuses on basic technical analysis and the price action of assets. By analyzing price actions, we can identify significant supply and demand zones that potentially represent orders placed by institutions.

SMC Trading Strategy

To effectively utilize the SMC, it is crucial to understand what occurs behind the scenes in trading. At its core, trading revolves around supply and demand, with a resistance between buyers and sellers. The side that possesses more capital ultimately prevails. Simply plotting graphs and lines on charts without grasping this concept will yield no significant changes.

This strategy revolves around identifying a “Change of Character,” which signifies a shift in market sentiment, such as from bullish to bearish or vice versa.

Step 1: Identifying Market Trends

For this strategy to succeed, we must identify markets that exhibit clear trends. Choppy markets make it challenging for traders to pinpoint the correct entry points. Additionally, trading in higher time frames allows for easier trend confirmation, as it is less influenced by market noise.

One method to identify market trends is by observing higher highs (HH) with higher lows (HL) or lower highs (LH) with lower lows (LL). In the provided example, we can see that the market price consistently rises, creating an upward trend. Each new wave surpasses the previous pattern (BoS), establishing new heights.

Step 2: Highlighting Supply and Demand Zones

Supply and demand zones represent areas where assets experience repeated buying or selling pressure, leading to reversals near those areas.

In the case of recent Tesla stock, there is a supply zone form by its previous triple top pattern. Highlighting this area indicates high selling pressure. Assets approaching this area have a higher likelihood of reverting back.

Two scenarios can unfold here: either the price gets rejected or it breaks through the pattern, creating a new high. In either case, the change will be more significant than previous sub-waves, as a concentrated of orders are placed near that area.

Step 3: Identifying Order Blocks (OB) and Fair Value Gaps (FVG)

An order block is an area where there is a large concentration of limit orders waiting to be executed, which is more short term than support and resistance zones. Order blocks often accompanied by a directionless market and increased volume.

A fair value gap is a price gap that occurs when there is a sudden and significant imbalance between buying and selling pressure in the market. This imbalance can create a gap in the price chart, which can be used to identify potential trading opportunities.

Fair Value Gaps (FVG) consist of three candlesticks, where the middle one is significantly larger than the other two, due to a sudden imbalance between buy sell orders, creating a gap between the first and last candlesticks.

Look at the chart of Tesla again. Imagine being a buyer who purchased before a significant dip; you may want to dilute the cost by buying more. Short sellers aiming to take profit may also want to close their positions at this point. Price is likely to close the gap within the fair value gap.

Based on our observation that the price failed to break through the previous supply zone and broke down from the trendline, it is favorable to enter a short position in the fair value gap.

Step 4: Market Entry with Change of Character (ChoCh)

To enhance market entry accuracy, we need to analyze price action in a lower time frame.

Upon switching to the lower time frame, we notice that the price consistently rebounds near the 38.2% Fibonacci level. This suggests that the selling liquidity is significant, potentially preventing a recovery of the gap. Therefore, we can use a smaller Order Block, together with Change of Character to confirm the shift in market trend. We open a short position after observing a lower high in the pattern.

We set our stop loss point slightly above the 38.2% Fibonacci level and our take profit point at the next demand zone, where buying pressure may arise. This trade offers an 8% potential gain with a risk/reward ratio of 1:2.

What’s Next for Tesla Stock?

The Tesla stock has broken down from the recent support level and is approaching the next demand zone near the $210 to $217 level. This represents a 30% drop from the recent peak. We may anticipate a short-term rebound from that level. However, since the market remains in a downtrend, we may continue to witness the stock moving downward after a consolidation period.

To confirm a bullish sentiment, we must observe another Change of Character in the opposite direction, signifying a break from the previous lower high. This may prove challenging due to the prevailing selling pressure.

We would love to hear your thoughts on this strategy! Does it work for you?

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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves risk, and it is important to conduct thorough research and seek professional guidance before making any investment decisions. Prospective investors are encouraged to perform their own due diligence or consult a financial advisor before making investment decisions.