[00:01] Hey guys, the trading space is often filled with confusion and scattered information, making it hard to stick to a trading plan and achieve consistent income from the market. Therefore, we want to present a full smart money trading plan, guiding you step by step
[00:16] from beginning to end. In this video, first we will explain how to apply smart money concepts step by step on the chart to make a well-informed general analysis. Then, we will walk you through our trading setup, providing specific entry and exit points.
[00:32] Lastly, we will present the backtesting results, offering objective evidence of how the strategy has performed in the past. So if that's something you're interested in, make sure to smash the like button for me to show your support, and subscribe to our channel if you're new.
[00:46] See you after the intro and disclaimer. Welcome back, guys, and let's get started.
[01:05] Now, a few key concepts in the smart money trading plan require practicing on the chart before grasping the trading strategy I'm about to share. First, we have market structure and direction.
[01:17] This involves determining the key levels of the chart structure and identifying bullish, bearish, and directionless markets. Next, we have optimal trading zones and order blocks. These areas on the chart can potentially provide us with high-probability trade opportunities.
[01:33] Moving on, we have liquidity concepts. Liquidity fuels all markets, and it's crucial to identify where positions could be liquidated to prevent unexpected losses. Lastly, we have entry setup and managing an open trade.
[01:47] Once certain favorable conditions line up and we find an entry point, we execute the trade with specific order details. Also, managing open trade requires monitoring market conditions and adjusting for potential success.
[02:00] If you're new to trading and uncertain about these concepts, we recommend watching our previous videos on these topics first. Now let's get into the strategy. This trading plan consists of two major time frames.
[02:13] First, we have a higher time frame in which we will do most of our general analysis. We will read the market structure to find the direction, key levels, fair value gaps, liquidity areas, and more importantly, optimal trading zones that might potentially provide
[02:27] us with a high-quality trading setup. In the second part, we will zoom into our lower time frame to find confirmation and enter the positions. Remember that this trading plan is not limited to any chart or time frames.
[02:40] However, your entry timeframe must be two timeframes lower than your general higher timeframe. In this video, we are only going to use two timeframe combinations. If we analyze the market structure and find optimal trading zones in four hours,
[02:56] we will look for confirmations and entries in 15 minutes. Similarly, if our higher timeframe is the one-hour chart, we will zoom into five minutes to open positions. Now I have simplified this trading plan into five simple steps.
[03:10] After we go through the steps, we will look at the entry models to explain how the strategy could be implemented visually. If you cannot completely understand each of these steps, be patient because we're going to explore them in depth with multiple real chart examples.
[03:24] At the end of the video, I will show you the backtesting results, which will provide real evidence of how well the strategy has performed in the past. So let's start with the first step, analyzing the market structure.
[03:38] In this general analysis, we implement the market structure concepts of smart money to the chart to simply find the market direction and key levels. We have three types of markets in terms of direction.
[03:51] We have a moving uptrend, where the price continuously makes higher highs and higher lows, breaking the structure to the upside. So we want to trade with the dominant uptrend, because it increases the chance of success.
[04:03] This process continues until we get a change of character, which signals a possible reversal. Change of character occurs when we get a break and close below the lowest point of swing low between two consecutive highs.
[04:16] Second, we have a moving downtrend where the price continuously makes lower lows and lower highs, breaking the structure to the downside. Once again, we want to trade with the dominant downtrend until we get a change of character.
[04:29] Then the market sentiment will change to bullish. We also have a directionless market which occurs when the supply and demand are not powerful enough to push prices into a directional trend When we continuously get changes of characters on the opposite side and can surely identify the trend we have a directionless market This trading plan is a trend
[04:48] continuation strategy, so implement it when you can clearly identify the price direction. Here we have pound yen on the four hours chart. Let's implement the first step to find the direction in key levels. Here we have a clear moving uptrend that made a series of higher
[05:03] highs and higher lows and breaks to the upside. The market sentiment is bullish and we only want to look for buying opportunities. These are two of the recent consecutive highs so the lowest point of this correction is our swing
[05:15] low and as long as we stay above this key level we identify this market as bullish. The second key level is our latest high created by the price which we will use to set our higher timeframe target level. Now let's continue and see
[05:30] what the market will do next. Here we can see that the market broke structure and created a new high, but the market barely pushed the price upwards, and look at all our rejections,
[05:43] which shows a significant momentum loss. Then we have a break and close below the latest swing low, which makes it a valid change of character. Now we are no longer in an uptrend, and all we need to do is wait for a 1, 2, and 3 moves to the downside
[05:57] to identify the direction as bearish. Then, we mark the most recent key levels and look for short opportunities. Now this is all we need in the first step, identifying the market direction and key levels.
[06:10] Let's continue with the second step, key concepts of smart money. This step will identify fair value gaps, liquidity areas, and optimal trading zones on the higher time frame chart.
[06:22] The fair value gap is a three-candlestick pattern characterized by a significant gap between the shadows of the first and last candles, with no overlap.
[06:35] These gaps are created when we have an imbalance between the buyers and sellers, resulting in sharp moves. The market often returns to these gaps to take the remaining orders and restore the balance. Then, if we have enough liquidity, market will seek to continue in the same dominant direction.
[06:49] Liquidity is the fuel of the market. Liquidity areas are where retail traders enter the market and place their stops. Let's focus on equal highs and lows and the latest swings for simplicity.
[07:03] If the market grabs the liquidity areas, the chances of success will significantly improve. Optimal trading zones refer to areas where high-quality trading concepts conflict. Valid order block and order flow areas that meet the rules will be great levels to look for trading opportunities.
[07:19] Now, let's apply the second set to the real chart examples. Here on the EURUSD 4 hours chart, we have a moving downtrend. These are the considerable fair value gaps that are recently created.
[07:33] If the price returns to fill the gaps before continuing its general direction, it will provide us with a perfect trading opportunity. Now where is the liquidity area? We know for a fact that this level was our previous swing low.
[07:47] So if the price returns to this level, support turns resistance, and we expect a form of rejection. Traditional price action traders will see this as a short opportunity and sell the market.
[08:00] They will place their stop above the zone, which makes a lot of liquidity gather above this zone. So there is an opportunity for the big players to grab the liquidity they want, and the price will fall after the stops are triggered.
[08:13] This is why you have to identify the liquidity or become the liquidity. Now where is our optimal trading area? The candle that created the bearish inefficiency or the latest bullish pressure before the drastic move to the downside is a great place to look for short trading opportunities.
[08:29] But no matter how good your entry zone is, the market can easily ignore it and continue with the dominant momentum. That's why we need double confirmation and witness reversal signals on the lower time frames.
[08:42] Here on the dollar-yen one-hours time frame, we have a moving downtrend. let's apply the second step and mark the fair value gaps, liquidity areas, and optimal trading zones. We have a considerable fair value gap here, so we point it out.
[08:58] The market has created strong resistance and rejected this level multiple times, so we have a lot of liquidity gathered above these equal highs. This order block is a great area to look for short opportunities since it has a lot of great confluence.
[09:12] These are all the concepts we apply to the chart in the second step. In the next step we wait for the price to come and mitigate the fair value gaps Then we will zoom into the lower timeframes to look for confirmations and enter short positions Now let continue with the third step the confirmations and entry In this step we will
[09:33] apply the market structure concepts, wait for entry signals, and open the position aligned with the higher time frame analysis. After mitigating the fair value gaps area, we will look for reversal signals to confirm the entry. We must wait for a change of character to verify that the short-term
[09:49] trend is over and the market can continue going with the dominant higher time frame direction. If we have no change of character, we will have no trade. After the change of character confirmation,
[10:01] we have two entry trading models. In the bullish scenario, if the change of character move creates a valid order block with fair value gaps, we will place a buy limit of spread size above the order
[10:13] block and stop below the swing low. We will make our trade break even by closing half our position when the price reaches our 1 to 2 target. Next, we will close our profits if the price reaches our higher time frame supply area.
[10:28] The second trading setup occurs with no fair value gap and order block. In this case, we will put the Fibonacci retracement tool from the start to the end of the change of character move and place our buy limit precisely at the middle of the 618 and 786 levels.
[10:44] Our stop will be below the swing low and apply the same concepts for taking profits. Now let's have a quick recap of all of the steps we discussed. In this trading plan, we use two time frames.
[10:56] We have a higher time frame in which we do most of our general analysis and assess market conditions. Then we will zoom into the lower time frame to find confirmation and enter the trade. This trading plan is not limited to any time frame, but your entry time frame must be at least two times lower.
[11:14] In the first step, we analyze the market structure to find the market direction and key levels. We will point out breaks of structures and character changes to identify the market direction and mark the key levels that price can react to.
[11:27] For example, here we have a moving uptrend with multiple consecutive breaks to the upside. Since the direction is bullish and we want to trade with the dominant trend, we are only interested in long opportunities.
[11:40] This is the latest high created by the price, which we expect a possible reaction making it a suitable place to set our long-term target. This level is our recent higher low, which is also a key level, and if we get a break and close to the downside,
[11:54] we will no longer consider this market an uptrend. In the second step, we apply the key concepts of smart money on the chart and identify fair value gaps, liquidity areas, and optimal trading opportunities.
[12:07] So here, if the price makes a deep correction mitigating the fair value gap area, and grabbing the liquidity under these equal lows, we will have a perfect trading opportunity to go long. Now when should we buy this pair?
[12:19] We know this move is a short-term downtrend in the lower time frames, so we will zoom into the lower time frame to look for reversal and trade entry. In the third step, we will wait for a change of character
[12:31] to confirm that the short-term downtrend is over, and the market can continue pushing upward. We will use two entry setups to open positions. Number one, if the change of character creates fair value gaps,
[12:43] we will place our buy limit a spread size above the order block. Number two, if we have no gaps, we will use the retracement levels and enter positions in the middle of the 618 and 786 levels.
[12:55] Stops will be below the swing low and we can use multiple trade management strategies. Here's the checklist and important information about this trading plan we will use. You can risk 2-3% of your capital per trade
[13:08] and only have up to three open trades. But remember, before using this strategy with real money, you should backtest it on the past data to obtain the performance. Backtesting allows you to build the required confidence
[13:21] and prepare for potential risks associated with the trading. But unfortunately, it can be very time-consuming. That's why we use Trader Edge to backtest and keep track of all our trades. Let's suppose we want to backtest a trading setup on the euro-dollar in one hour time frame.
[13:37] We will first set up the chart on TradingView and adjust it. Then we will open TraderEdge's back tester and arrange it next to the chart. Here we will input our starting balance and risk per trade, which we've set to 2%.
[13:49] You can change this to any value you prefer, whether in dollars or percentages, for each individual trade. Once we're done with the back testing, TraderEdge will provide us with a detailed matrix,
[14:02] including important information such as win rate maximum drawdown and profit results It also allows us to save the data and add more backtests which will all be stored in the strategy library
[14:14] If you're interested in using Trader Edge, you can sign up for a seven-day free trial by checking the link in the description. Now, when we began backtesting, we randomly selected a period for the euro-dollar pair. Surprisingly, the first setups yielded a significant amount of profit.
[14:30] So let's walk through the chart step by step to illustrate what was going through our minds during the backtesting process. Here we have Eurodollar on the 4-hour time frame. The market has recently broken below the structure level, signaling a downtrend continuation.
[14:45] So we want to trade with the dominant downtrend. Here we have fair value gaps between the candles and this resistance level, which traditional traders will take as a short opportunity. So lots of liquidity have gathered above it.
[14:57] An optimal trading opportunity would be to wait for the price to mitigate the gap area, grab the liquidity, and look for reversal confirmations on the lower timeframes to enter short positions.
[15:09] So we zoom into 15 minutes time frame and wait for the price to make a change of character to confirm the short entry. But as you can see, we have no change of character due to Mass's bullish pressure, so we won't have any short trades.
[15:23] So let's get back to the 4 hour chart. Here we can see that the price has broken above the recent lower high, indicating that the previous downtrend is no longer valid. Now regarding market structure, we have a double bottom reversal pattern, with the second
[15:37] leg as a liquidity sweep movement. This strongly confirms that the market sentiment has changed to bullish. Now we can identify a significant fair value gap on the chart, presenting a potential long
[15:49] trading opportunity. We will patiently wait for the price to return to this gap area, and then zoom into the 15-minute chart to enter long positions. On the 15-minutes chart, we can see that the market has made a change of character, signaling
[16:05] that the short-term downtrend is over and the price can continue pushing upwards. This movement has created fair value gaps, so we'll use the first trading model.
[16:18] We'll place a buy order a bit above the order block and set a stop below the recent low. Now the market has given us another trading opportunity without triggering the first trade.
[16:30] There's a fair value gap and another order block, so we'll place another buy order without canceling the first one. We're still determining what the market will do next, but we will always stick to solid entry rules. In the best case, it will trigger one of the orders and continue pushing up,
[16:45] or it could reverse and cause us to lose both of the trades. Let's wait and see what happens. The price triggered our second trade and hit our target, resulting in a 4% gain.
[16:57] This is because we risked 2% of our capital per trade. Now, we have another order block and a new trading opportunity. So, without canceling the first trade, we'll open another position.
[17:09] Our first target will be twice our risk, and let's track our profits if the price moves in our favor. The close of these candles can be a reliable place to set our higher time frame target,
[17:21] and we will track our profits until we reach here. Let's see what the market does. The market has hit our first target, making us break even.
[17:33] This means that even if the price retraces and triggers our stop, we won't lose any money on the second trade. Every time the market makes a new higher low, we adjust our stop a couple of pips below it to secure our profits. Now this trade turned out to be great and gave us massive profits.
[17:49] But remember, trading live will be much more difficult because you also have to deal with emotions. However, backtesting on past data is the best way to test the trading system and prepare for different trading scenarios. Now these are the results we have got after
[18:05] backtesting this trading plan on the euro-dollar pair for a month. We had taken 16 trades during this period. Although our win rate was 50%, we gained 23% profits. Our profit factor was 2.38,
[18:18] and we only suffered a 4.75% drawdown. But remember, trading on the live account involves real money and real emotions. It's a whole different ballgame compared to paper trading
[18:30] or simulations. The key to success is sticking to your trading plan, which acts as your blueprint for success. So guys, I hope this video provided value to you. If it did, please go ahead and smash the like button to show your support. And if you're new here, consider subscribing to our channel.
[18:46] See you in the next episode.