Understanding Smart Money Manipulation: A Five-Step Process

90% of Traders lose money because they don’t know about smart money manipulation. In this blog post, I will reveal the five-step process that big money uses to trap unprofitable retail Traders time and time again. Here is the overall model that we’re going to be depicting, broken down step by step.

Phase One: The Range Process

Phase number one, and what smart money love to create before they are going to make a very large move, is The Range Process. A range is when price gets caught between a high and a low, moving sideways. Some of you might think of it as sideways price action. Essentially, you’ll have some sort of Swing high and some sort of swing low, and then price will range in the middle of this, giving you sideways price action. Lots of Traders don’t understand that this is actually done on purpose.

By doing this for an extended period of time, what they’re doing is inducing the other side of each market into forming an idea of what price is going to do. From a smart money Trader’s perspective, this is seen as a liquidation of a high and a liquidation of a low. Each part of this has its own unique phase, which I will walk you through from phase one to five.

Phase Two: Liquidation Phase

Phase two of this smart money manipulation model is the Liquidation Phase. Before price wants to go into its desired Direction, let’s say smart money wanted to take price higher, they would first sell into an area of liquidity. They would take out these lows and internal lows because they need to create a perceived supply of the asset they’re trading.

Every buy transaction needs a sell transaction, and smart money, with their large amounts of capital, first need to manipulate price to go in whatever direction they want. For example, if they want to buy, they may not have enough sellers willing to take the other side of that position at the price they want. Therefore, they need to create the other side of the market, which is what the manipulation is.

Phase Three: Initiation Phase

Phase three is the Initiation Phase. This is where smart money shows you their real hand, the direction they truly want to trade in. We’ve created this range, created sell-side liquidity, buy-side liquidity, and had the liquidation which was phase two. The purpose of that liquidation was to create the opposite side of liquidity so they could get better averages in their orders.

Once we see a market structure shift in the opposite direction, that signifies that smart money has just initiated their true potential. This leads us to phase four.

Phase Four: Mitigation Phase

The Mitigation Phase is where their objective becomes mitigated. Once they’ve initiated price and shown their hand, price will come into phase four, which is the Mitigation Phase. This phase involves returning back to the area that actually manipulated and then bought. Smart money uses their liquidity to manipulate price, selling into a level to capture all the liquidity and then buying that supply with all their demand.

They need to cut the losses from the short positions they placed during the manipulation phase. Additionally, they need to fill more orders in the market to continue moving price. This process continues until their objective is completed. This brings us to phase five.

Phase Five: Continuation

Phase five is the Continuation phase. At this stage, price will continue in the direction initiated by smart money. The key is to identify phases one through three, get involved in phase four, and exit in phase five.

Example: Euro USD Analysis

Let’s take a look at what this looks like in the actual live markets. Here we are on Euro USD just about to open up for the London session. The blue box represents Asia, a large pool of liquidity acting as the range phase. We’ve mapped out the high and the low, representing our range.

We wait for a clear sign of manipulation or inducement. As price plays out, you’ll see an aggressive buy out of the level, creating inducement. This adds more available liquidity at these levels because now we have a bunch of stop losses and more orders below this low, which is what they need to trigger the real move into their desired direction.

There are many traders in these levels, such as those who buy this area of support or sell on the breakout. All of these interactions have liquidity that smart money wants to initiate. This process helps smart money create the opposite side of the liquidity.

Identifying the Initiation Phase

After the inducement and Liquidation Phases, we need to see the Initiation Phase. When price breaks a certain high, it signifies that smart money has initiated their game plan. This is confirmed by a market structure shift in the opposite direction.

Once confirmed, we identify the order block, which is the area where smart money sold to buy. Price will likely return to this level for mitigation, allowing smart money to close their short positions and fill more orders. This leads us to phase four, where we look for confirmation that this level will hold.

Getting Confirmation

We drop down to a lower time frame, such as the one-minute chart, to get confirmation. We look for a shift in trend, indicating that smart money has initiated their orders. Once confirmed, we place our long position, ensuring our stop loss is adequately placed.

By following these five phases, we can better understand and trade alongside smart money, improving our chances of success in the market.

If you want to learn more about these concepts and how to trade them, we currently have a crazy offer on. You can check the link down in the description.

Read More: The Best Positional Trading Strategy: Capture the Long-Term Trend