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Schools & Theories in Technical Analysis

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Published by Qusai Mustafa, 2025-02-27 11:23:04

Trading Schools & Theories

Schools & Theories in Technical Analysis

1. Smart Money Concept


Concept of following the moves of institutional investors, central banks, hedge funds and market makers in their financial market manipulation. Main Idea: Smart Money Concept The Smart Money Concept (SMC) centres on the principle that the movements of large institutional investors in financial markets can offer valuable clues to retail traders about future market trends as they conduct extensive research before making substantial trades. 151 The Smart Money Concept (SMC) is not officially attributed to a single founder, but it is heavily influenced by the teachings of ICT (Inner Circle Trader), also known as Michael J. Huddleston. ICT introduced many of the core ideas behind SMC, including concepts like market structure, liquidity, order blocks, and fair value gaps.


Smart Money Concept (SMC) A trading approach that focuses on how big institutions (smart money) move the market. Instead of relying on traditional indicators, SMC traders analyze price action to understand how liquidity is created and taken. VD EarkKt SturcturJ AD Li>uiWit= :D OrWKr Bl8ck< 7D Fair ValuK 6a5 4D EitiBati8n & RKvKr;al P8int; Understanding Smart Money Concepts allows traders to see the market from an institutional perspective. By recognizing market structure, liquidity zones, order blocks, and fair value gaps, traders can make more informed decisions and avoid common retail trading traps. In this guide, we will cover key SMC principles 152


A. Market Structure A. Break of Structure (BOS) Occurs when the market breaks a key high or low, confirming a trend continuation. It helps traders identify the strength and direction of the market. How to Identify a BOS Rl Uptrend BOS (Bullish Continuation) The price creftes higher highs (HH) fnd higher loSs (HL). mhen price brefks the preOious high, it signfls f continuftion of the uptrende Nl Downtrend BOS (Bearish Continuation) The price forms lower lows (LL) and lower highs (LH). mhen price brefks the preOious loS, it confirms f befrish trend continuftion. 153


B. Change of Character (CHOCH) Signals a potential trend reversal in the market. It occurs when the price breaks a key structure level in the opposite direction of the current trend. How to Identify a CHOCH Vr Bullish CHOCH (Bearish to Bullish Reversal) The markes is in a doWnsrend (LL, LH)e Price breaks she previous loWer high (LH)e This shifs signals shas bulls may sake consrol, and a reversal so an upsrend is possibled ?r Bearish CHOCH (Bullish to Bearish Reversal) The market is in an uptrend (HH, HL). Price breaks the previous hi@her low (HL). This su@@ests that bears are takin@ control, indicatin@ a potential downtrend. 154


C. Higher Highs (HH) & Higher Lows (HL) The price breaks above the previous high. Confirms bullish strength and continuation of the uptrend. D. Lower Lows (LL) & Lower Highs (LH) The price breaks below the previous low. The price retraces but does not break the previous high. 155


B. Liquidty Refers to the presence of orders (buy or sell) that institutions or large market participants may use to fill their positions. When price enters a fair value gap, it often seeks liquidity, meaning it aims to close inefficiencies left behind by rapid price movements. A. Liquidity Sweeps Smart money targets areas where retail traders place stop-losses (e.g., above swing highs or below swing lows). B. Equal Highs/Lows These areas attract liquidity, and institutions often manipulate price to trigger stop-losses before reversing. 156


C. Order Blocks (OBs) Price zones where institutions and smart money place large orders, causing significant market moves. These zones often act as areas of support or resistance where price is likely to react. A. Bullish Order Block (B-OB) The last bearish candle before a strong bullish move. Acts as a demand zone where price may return before continuing higher. 157


D. Fair Value Gaps (FVGs) Imbalances in price caused by strong institutional moves. Price often revisits FVGs to fill inefficiencies before continuing What Causes Fair Value Gaps (FVGs)? CZ Strong Price MovesentG t When price moves qDicHly in one direc[ion (dDe [o news, lNrge orders, e[c.), i[ cNn leNve gNps be[ween cNndles[icHs, where no or minimNl price Nc[ion [ooH plNceM rZ Lack of Market ParticipationG t A lNcH of order flow dDring [hese rNpid moves cNDses N vNcDDm, leNving N gNp [hN[ [he mNrHe[ of[en "wNn[s" [o fill lN[er on. 1u8


": Locating FV65 Y Look for g/ps be;#een c/nMles;icks #here price MiMn’; ;r/Me in ;he /re/. Y A ;ypic/l f/ir v/lue g/p coulM look like / sh/rp move up or Mo#n #i;h li;;le ;o no price /c;ion be;#een ;he c/nMles. L: FV6s and Ordr Blocks ROBs Y Of;en, /n FVG forms righ; /f;er / bullish or be/rish orMer block. Ihe price c/n re;r/ce ;o fill ;he g/p before con;inuing in ;he Mirec;ion of ;he ;renM. Y ey Are/s ;o W/;ch: When price revisi;s / g/p, i; of;en re;es;s ;he orMer block ;h/; c/useM i;. : Trad with Markt Structur  Bullish FV6: If ;he m/rke; s;ruc;ure is bullish /nM ;he price pulls b/ck ;o fill / g/p, i; coulM sign/l / con;inu/;ion of ;he ;renM.  Barish FV6: If ;he m/rke; s;ruc;ure is be/rish /nM ;he price re;es;s / be/rish FVG, i; coulM sign/l ;he con;inu/;ion of ;he Mo#n#/rM move. 4. Waiting for th RtstH Y Once / g/p is formeM, #/i; for price ;o re;urn /nM ;es; ;he g/p before en;ering / ;r/Me. Y Look for confirm/;ion from orMer blocks or liquiMi;y zones ne/rby ;o /MM more confluence. Q: FV6 and Liquidity SwsH Y A liquiMi;y s#eep m/y h/ppen /rounM /n FVG zone, gr/bbing s;op losses before filling ;he g/p /nM con;inuing ;he ;renM. How to Identify Fair Value Gaps ZFVGs) 159


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