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Key Takeaways
- SMC organizes a chart around swing structure, liquidity levels and reaction zones.
- Use BOS for continuation and CHoCH for the first break against the prevailing swing sequence.
- An order-block zone and a fair-value-gap band use different construction rules.
- Within a range, the midpoint divides the upper premium half from the lower discount half.
- A complete plan names the trigger, entry, stop reference, target and intended timing.
What is Smart Money Concepts (SMC)?
Smart Money Concepts (SMC) is a price-action framework that organizes Market Structure, liquidity levels and reaction zones into a trading plan. It names continuation and opposing structure breaks, sweeps of prior highs and lows, order-block zones and fair-value-gap bands, then connects those levels to a trigger, entry, stop reference, target and timing.
BOS and CHoCH distinguish continuation from the first opposing break. A Liquidity Sweep tracks an excursion through a prior high or low and the return back inside. An Order Block marks a zone around the last opposing candle before an impulse. A Fair Value Gap uses a three-candle comparison of the outer ranges.
Each object has its own construction rule. Start with the chart interval and the price references that control the setup, keep every rule explicit, and carry the actual price levels into the plan.
How are premium and discount defined in SMC?
Mark a $96 low and a $104 high. Midpoint = ($96 + $104) / 2 = $100.
Within the range, $96 to below $100 is the discount half; above $100 to $104 is the premium half. Price at $100 is the midpoint. Prices outside $96–$104 are outside the range.
The $102.60 entry is ($102.60 − $96) / $8 = 82.5% of the range span.
Formula
For selected low L < high H: midpoint M = (H + L) / 2; discount half L ≤ price < M; premium half M < price ≤ H; price = M is equilibrium- The $96–$104 range has midpoint $100.
- The $102.60 entry lies in its upper half, at 82.5% of the low-to-high span.
- Prices below $96 or above $104 are outside this range; the $104.35 sweep is above its high.
SMC liquidity sweep example
Mark the $96–$104 range. Price trades to $104.35, then returns inside and closes at $102.60. The range-sweep short enters at $102.60 with a stop at $104.45 and a $96 objective.
- Range midpoint: ($104 + $96) / 2 = $100
- Sweep beyond the range high: $104.35 − $104 = $0.35, or 0.34% of the high
- Return from the extreme to the close: $104.35 − $102.60 = $1.75
- Entry location: ($102.60 − $96) / $8 = 82.5% of the range
- Entry-to-stop distance: $104.45 − $102.60 = $1.85
- Distance to $96 target: $102.60 − $96 = $6.60; ratio $6.60 / $1.85 = 3.57
The plan combines a sweep above $104 with a return inside the range. The $96 objective gives $6.60 target distance against $1.85 planned stop distance. The $104 range boundary marks the sweep and the $104.45 stop marks the exit, two separate levels.
That failed break is the trigger for the range-sweep short. A CHoCH trader waits instead for price to break the last higher low, the first break against the advance, and shorts that break.
SMC trade plan: entry, stop and target
The short enters at $102.60, with the stop at $104.45 and the target at $96. Planned stop distance is $1.85. Target distance is $6.60, giving a 3.57 ratio. A separate midpoint objective at $100 would give $2.60 target distance and a 1.41 ratio.
The $104 range boundary and $104.45 stop reference have different roles. A move to $104.20 is above the range high while still below that stop reference.
Use Volume Profile to examine traded volume by price, and for an options trade, carry the target and timing into the expiration, premium and volatility inputs of the Options Profit Calculator.
Limitations of Smart Money Concepts
- Confirm the read with participation. The levels come from candles, which record where price traded, so check volume and options flow before you treat a sweep as institutional.
- Write your rules down before you mark the chart. The interval, which swings count, the range and each zone’s construction rule vary between authors and platforms, so two traders mark different levels on the same chart unless they share the rules.
- Pick the range before you call premium or discount. The labels describe position inside that range, so a wider range moves the $100 midpoint, and with it the line between premium and discount.
- Set the stop beyond the sweep extreme. When a second push takes price back through $104.35, the $104.45 stop caps the loss at the planned $1.85.
- Weigh the 3.57 ratio against the odds. It compares planned distances, so pair it with how often your sweeps reach the far side of the range; the $100 midpoint target trades a 1.41 ratio for a shorter trip.
Bottom line
Smart Money Concepts gives traders a shared vocabulary for structure breaks, liquidity sweeps, order blocks and fair value gaps, and turns those levels into a defined trade plan. Define each construction rule before marking the chart, keep the range boundary and stop reference as separate levels, and size the trade from the distance to the stop.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- Fidelity: Support and Resistance
- Fidelity: What Is Technical Analysis?
- Cboe: U.S. Equities Market Share by Venue
How entries are sourced, calculated and updated: editorial methodology.