Classical Retail Trading Vs Smart Money Concepts Battle for Superiority (Part 3)

The Origin of the Battle

Just like any great war, there is a Genesis to the story and the battle between classical retail trading and smart money concepts is not different.

As I said before, the smart money concept is still a relatively new concept as far as trading in general goes, cause the concept became popularized in 2016 by the founding father, The Inner Circle Trader (ICT).

It would be incomplete to talk about the battle of these two schools of thought without talking about Michael J. Huddleson also known as (ICT). Trading already had mentors and Gurus before the surfacing of (ICT) and when he showed up, he began to challenge the ideas of these Gurus I wouldn’t say he did so politely, however, caused a lot of waves on the internet as people began to jump ship and give audience to (ICT).

I Want to Break Down this Battle in Two Parts

• How did this war actually start?

1. Difference of concepts.
2. Attack on classical retail trading.

• My take on the two trading concepts:

1. Which concept works
2. Can the two actually work for you

Difference of Concepts (Classical Retail Trading)

Classical retail trading has a lot of concepts, but I will cherry-pick the important ones that give context to how and why the battle between these schools of thought started and is still in play.

I will be talking about the:

1. Double Tops and Double Bottoms Pattern
2. Bull Flag and Bear Flag

Double Tops and Double Bottoms: 

This pattern says that when the price makes two consecutive swing points, in the case of a Double top, making two consecutive swing highs, and in the case of a double bottom two consecutive swing lows then the price is not willing to keep going in the direction of those swing points and it wants to reverse.

Taking double tops for example, if the price makes two consecutive swing highs this will mean higher prices are exhaustive and the price wants to start going to the downside, therefore expect bearishness.

In the case of double bottom, the reverse is the case, as in if the price makes two consecutive swing lows, that is lower prices are exhaustive and the price wants to start moving to the upside, therefore expect bullishness.

This is how retail traders treat the double tops and double bottom patterns.

Bull Flag and Bear Flag: 

This pattern is mostly a continuation pattern and is expected in a trending market, the mechanics are like this:

For a Bull flag, the price is expected to be in a prior up-trend and then a consolidation occurs, it is in these consolidations retail traders then look at the behavior of the market where they draw their flag pole along the up-trending candle sticks and they use fitting lines to demarcate the consolidation representing the flag cloth, then they wait for a break-out to the up-side.

For a Bear flag, the price is expected to be in a prior down-trend and then a consolidation occurs, it is in these consolidations retail traders then look at the behavior of the market where they draw their flagpole along the down-trending candle sticks and use fitting lines to demarcate the consolidation representing the flag cloth, then they wait for a break-out to the downside.

Difference of concepts (Smart Money Concepts)

Smart Money concepts have a lot of trading models, but for this discussion, I will pick his concepts that directly have a relationship with the above retail concepts, so that there will be context as to why the battle got personal on a conceptual basis.

I will be talking about the:

1. Internal Liquidity (F.V.G)
2. External Liquidity (Equal highs and Equal lows)

Internal Liquidity (F.V.G): 

This pattern as I have said earlier in the introduction to smart money concepts is a three-candle stick pattern that has two premises.

Buy-side Imbalance Sell-side Inefficiency (BISI)

Sell-side Imbalance Buy-side Inefficiency (SIBI)

The former requires that the wick high of the first candle in the series isn’t touching the wick low of the third candle in the series, and the rule of thumb is that this space is a gap and thereby an inefficiency which price will come back to at a later time. When the price comes back to it there can be some reactions to the other side of the range, provided that all conditions are met for the reaction to take place as expected.

The latter requires that the wick low of the first candle in the series isn’t touching the wick high of the third candle in the series, and the rule of thumb is that this space is a gap and thereby an inefficiency which price will come back to at a later time. When price comes back to it there can be some reactions to the other side of the range, provided that all conditions are met for the reaction to take place as expected.

What are these conditions?

That is where the concept of liquidity comes in, as was said before I outlined that the smart money concept believes that price moves to where liquidity is, and price would not make significant moves unless there is an area of liquidity along the way.

So, what makes the reaction occur on this Bisi and Sibi is the fact that once price fills the inefficiency it searches for the next areas of liquidity, and according to smart money, liquidity sits under equal lows and highs and also within Bisi and Sibi’s. So where is the price moving to after it fills an inefficiency?

Yes, you guessed right! The next pool of liquidity.

External Liquidity (Equal highs and Equal lows):

These are areas in liquidity that are visible by swing points, and you find them on the chart like this

Equal highs: Two consecutive swing highs at the same level or closely the same level of price

Equal lows: Two consecutive swing lows at the same level or closely the same level of price

And Smart Money Concept traders hunt for these sorts of anomalies, because they believe the algorithm of the market likes to make those levels Jaggard, which forms their concept of external level of liquidity, if the price moves to where liquidity is, then it will surely move to those levels of equal highs and equal lows in search of liquidity.

Attack on classical retail trading

The purpose of talking about the concepts of these different schools of thought was for you to understand how the battle stemmed from Concepts.

SMC Started It:

I’m Not Gonna lie, although it sounds funny, but the SMC world came on with a full-fledged attack on the retail world and the Argument was on the fallibility of the retail patterns.

SMC’s Ideology rests heavily on liquidity, where the liquidity is located, and they believe their liquidity is located in a place directly opposing the purpose of retail trading patterns. Yes!

This began the back and forth.

I will outline the battle in a pattern versus pattern basis:

1. SIBI VS BULL FLAG X EQUAL LOWS AS DOUBLE BOTTOMS
2. BISI VS BEAR FLAG X EQUAL HIGHS AS DOUBLE TOPS

Let’s begin!

SIBI VS BULL FLAG X EQUAL LOWS AS DOUBLE BOTTOMS: 

The workings of a bull-flag pattern are for bullish continuation, retail traders wait for the pattern to break out of the consolidation and continue higher, this is how retail traders have been taught to see the market when they identify this pattern.

But smart money traders see the complete opposite of this, how so?

They believe that if the price has already completed objectives to the up-side, especially if an area of liquidity has been cleared at the buy-side and there is an uncleared area of liquidity at the sell-side, then the price will never respect a bull-flag. The satisfied area of liquidity could have been price filling in a Sibi and what did we say about SIBIs, once they are filled there can be a reaction and if there is liquidity unsatisfied at the sell-side it will gravitate towards that, after-all price moves on the sole basis in the search of liquidity. And if the remaining area of liquidity is an equal low then smart money traders expect the price to clear that area, which further attacks the very essence of the retail double bottom pattern. This sparked a serious argument between the two schools of thought.

• Retail traders believe a bull flag is a bullish Continuation pattern.
• Smart money traders say no to that if the bull flag has entered an area of SIBI and there is an opposing unsatisfied level of liquidity.
• Retail traders say the double bottom pattern is expected to be a bullish reversal pattern after the price breaks out of the neckline.
• Smart money traders say no to that cause the double bottom pattern is an equal low and the liquidity that the market seeks, rests below that level.

BISI VS BEAR FLAG X EQUAL HIGHS AS DOUBLE TOPS: 

The workings of a bear-flag pattern are for bearish continuations, retail traders wait for the pattern to break out of the consolidation and continue lower, this is how retail traders have been taught to see the market when they identify this pattern.

But smart money traders see the complete opposite of this, how so?

They believe that if the price has already completed objectives to the downside, especially if an area of liquidity has been cleared at the sell-side and there is an uncleared area of liquidity at the buy-side, then the price will never respect a bear flag. The satisfied area of liquidity could have been price filling in a Bisi and what did we say about BISIs, once they are filled there can be a reaction and if there is liquidity unsatisfied at the Buy-side it will gravitate towards that, after-all price moves on the sole basis in the search of liquidity. And if the remaining area of liquidity is an equal high then smart money traders expect the price to clear that area, which further attacks the very essence of the retail double top pattern. This sparked a serious argument between the two schools of thought.

• Retail traders believe a bear flag is a bearish Continuation pattern.
• Smart money traders say no to that if the bear flag has entered an area of BISI and there is an opposing unsatisfied level of liquidity.
• Retail traders say the Double Top pattern is expected to be a bearish reversal pattern after the price breaks out of the neckline.
• Smart money traders say no to that cause the double Top pattern is equally high and the liquidity that the market seeks rests above that level.

Which Concept Works

I have a confession!

The purpose of my starting this discussion ever wasn’t to pick sides but to highlight the unreasonableness of the differences these schools of thought have.

In the genesis of my discussion, you will notice that I gave numerous examples of veterans both in the classical retail school of thought and also smart money school of thought. And there is no doubt that if their concepts do not work, they won’t have such a large following.

So rather than trying to pick sides for ego, why not just pick a concept dissect it, and see whether it works for you?

Can the two actually work for you?

Whether the two concepts can work for you is entirely dependent on your personality type

After all, whether smart money or classical retail trading, they all are just concepts made by men who took their time to identify repeating patterns in the market. Therefore, it is left to you to do the same thing these men have done which is to dig your hands in the dirt and start collecting data based on what you see. Then only will you discover what works for you, maybe you could even find something entirely new in the marketplace and that will be your concept, made out of the data you have collected.

Exciting, isn’t it? I know a lot of men who have created something new just by looking at the chart, studying, and grinding. I even know some men who through diligent studying have been able to blend retail concepts and smart money and it has worked for them just fine.

So, the question of the two concepts working is entirely dependent on your perspective which will shape your reality, thus the answer.

That will be all for this week, till next time, Be Safe!