Module 5: Core SMC - Confluence & Strategy
You'll Learn: How to combine multiple SMC concepts for high-probability setups, implement common SMC trading strategies, and apply essential risk management principles.
Confluence: The Power of Multiple Confirmations
Confluence refers to the alignment of two or more independent analytical tools or concepts that point to the same trading decision or price area. In SMC, this means identifying areas on the chart where multiple institutional footprints and structural elements overlap, significantly increasing the probability of a successful trade.
Instead of relying on a single concept (e.g., just an Order Block), confluence allows you to build a stronger case for a trade by confirming the area with additional factors like Fair Value Gaps, liquidity sweeps, or specific market structure shifts.
Think of it like a weather forecast: A single sign (e.g., dark clouds) might mean rain. But if you also have falling barometric pressure, a strong wind, and a specific temperature drop, your confidence in rain increases significantly. Each additional factor is a point of confluence.
Example of Strong Confluence:
Price retraces into a Discount Zone (for a buy).
Within that Discount Zone, there's a clear Bullish Order Block.
The OB aligns with an unfilled Fair Value Gap (FVG).
Before reaching the OB/FVG, price has just swept Sell-Side Liquidity (SSL).
On a lower timeframe, price shows a Change of Character (ChoCH) after hitting this confluence area.
Don't force confluence. Look for clear, naturally occurring alignments. Too many or weak confluences can lead to "analysis paralysis" or low-probability setups.
Top-Down Analysis (Multi-Timeframe Analysis)
Top-Down Analysis is crucial for aligning your trades with the larger institutional flow. It involves starting your analysis on a higher timeframe (HTF) to establish bias and key structural levels, then drilling down to lower timeframes (LTF) for precise entries and trade management.
Higher Timeframe (HTF) - Monthly, Weekly, Daily
Purpose: Determine the overall market bias (bullish, bearish, or consolidating), identify major swing highs/lows, external liquidity, and significant institutional price action (major OBs, large FVGs).
This gives you the "direction of the wind" for your trades.
Mid Timeframe (MTF) - 4-Hour, 1-Hour
Purpose: Refine structural points, identify intermediate Order Blocks and Fair Value Gaps within the HTF bias, and look for potential Points of Interest (POIs) where price might react. This is where you might plan your entries.
Lower Timeframe (LTF) - 15-Minute, 5-Minute, 1-Minute
Purpose: Execute precise entries. Once price approaches a POI identified on the HTF/MTF, you drop to the LTF to look for entry triggers like a Change of Character (ChoCH) or a confirmation Order Block that leads to your entry.
Never trade against your HTF bias. If the Daily chart is bearish, don't look for significant long trades on the 15-minute. Only look for shorting opportunities or short-term counter-trend longs targeting the next internal liquidity.
Common SMC Trading Strategies
Here are some of the most common and effective SMC strategies. Remember, these are not rigid rules but frameworks to build your own trading plan, always seeking confluence.
1. BOS Continuation Strategy
Concept: Trading in the direction of the established trend after a confirmed Break of Structure (BOS).
Setup:
- Identify clear HTF trend and a recent BOS.
- Identify the originating Order Block or FVG within the Discount (for buys) or Premium (for sells) zone that led to the BOS.
- Wait for price to retrace back into this OB/FVG.
- On LTF, look for confirmation (e.g., ChoCH within the OB, displacement away).
- Enter with stop loss below/above the OB and target next liquidity or structural high/low.
2. ChoCH Reversal Strategy
Concept: Trading a potential trend reversal after a Change of Character (ChoCH).
Setup:
- Identify HTF trend and a clear ChoCH against it.
- Identify the originating Order Block or FVG that caused the ChoCH.
- Wait for price to retrace back into this OB/FVG (often the flip of the broken structure or a mitigation block).
- On LTF, look for confirmation (e.g., displacement away, smaller ChoCH in the new direction).
- Enter with stop loss below/above the OB and target previous structural lows/highs or external liquidity.
3. Liquidity Sweep Reversal Strategy
Concept: Trading a reversal immediately after price "sweeps" or "grabs" liquidity from obvious highs/lows.
Setup:
- Identify clear liquidity pools (equal highs/lows, trendline liquidity, old swing highs/lows).
- Wait for price to aggressively "sweep" that liquidity with a wick, often followed by quick rejection (a "fakeout").
- On LTF, look for immediate ChoCH or a strong opposing candle breaking structure back in the opposite direction.
- Enter as price reverses, placing stop loss just beyond the sweep wick. Target the opposite liquidity or next structural level.
Risk Management & Position Sizing in SMC
No matter how powerful SMC concepts are, losses are an inevitable part of trading. Effective Risk Management is paramount to long-term success.
Define Your Risk Per Trade:
Only risk a small percentage of your total trading capital per trade (e.g., 0.5% to 1%). This ensures no single loss can significantly damage your account.
Strategic Stop Loss Placement:
Always place your stop loss in a logical place that invalidates your trade idea.
- For buys: Below the Low of the Order Block or below the originating swing low.
- For sells: Above the High of the Order Block or above the originating swing high.
Intelligent Take Profit Targets:
Identify clear targets where Smart Money might take profit or where liquidity lies.
- Target opposing liquidity (BSL for shorts, SSL for longs).
- Target previous significant structural highs/lows.
- Consider partial profits at intermediate targets.
Position Sizing:
Calculate your position size based on your defined risk percentage and your stop loss distance in pips. This ensures you only risk your desired amount regardless of the stop loss size.
Risk-to-Reward (RR) Ratio:
Aim for trades with a favorable Risk-to-Reward ratio (e.g., 1:2, 1:3, or higher). This means for every 1 unit of risk, you aim to gain 2 or 3 units. A high RR ratio allows you to be profitable even with a win rate below 50%.
Never risk more than you are comfortable losing on a single trade. Over-leveraging and poor risk management are the fastest ways to blow up a trading account, even with a strong strategy.