Smart Money Concepts can be applied for the identification of trend reversal in Forex and Gold trading.
In this article, we will discuss what is an inducement and a trap in SMC. And how to apply them to spot an accurate trading signal.
We will study the important theory and go through real market examples on XAUUSD chart.
Imagine that there is a strong historical resistance on a price chart.
Because the price reacted to that strongly in the past, many sellers will place selling orders on that in future, anticipating a similar reaction.
Placing short trades, their stop losses will lie above the resistance.
In case of a bullish violation of the underlined resistance,
sellers will be stopped out from their short trades and close their positions in loss.
After the violation of a resistance, according to the rules, it should turn into support. Many traders will place their buy orders there, anticipating a bullish continuation.
Bearish violation of such a support will stop out the buyers as well.
Such a price action will be called an inducement and a bullish trap.
With that, smart money grab the liquidity both from the buyers and from the sellers.
After that, with a high probability, the market will drop.
Bullish violation of an all-time-high on Gold can easily be a bullish trap.
To confirm that, the price should simply break and close below a broken horizontal resistance.
That will confirm a local bearish reversal.
With a bullish trap and inducement, smart money are quietly placing HUGE SELLING ORDERS, making the retail traders close short trades in loss (buy their positions) and buy from the broken structure, providing them the liquidity.
The ability to recognize the traps will let you understand real intentions of smart money and trade with them.
