How to read an SMC analysis when you are starting out
Updated on
The short answer
A plan is read in a precise order. The direction says whether the hypothesis is bullish, bearish, or that there is nothing to do. The order type says whether you enter now or wait for a price. The entry and the stop bound your risk, and it is the gap between them that sets the size, never the other way round. Several targets mean several orders, across which the size is split rather than copied. A plan is not a prediction, it is a hypothesis with a numbered point of invalidation.
The direction, and the case where there is none
The first line says whether the reading is to buy, to sell, or whether it is better to wait. The first two are obvious, the third deserves a word.
An analysis that concludes there is nothing to do has not failed. On a market with no usable structure, the honest answer is that no scenario holds, and an analysis that always found something to propose would be worthless: it would be saying yes because you asked, not because the chart justifies it.
It is the easiest line to ignore and the most expensive one to ignore.
The order type: enter now, or wait for a price
A market order executes immediately at the current price. A limit order waits for price to come back to a level judged more favourable. A stop order waits instead for price to go beyond a level, entering only once the move is confirmed.
Smart Money Concepts logic favours waiting for a return to a zone over chasing a move already under way. The reason is arithmetic: the further you enter from the originating zone, the wider your stop has to be and the closer your target is, so the ratio between the two degrades.
A pending order is not a position. Until it triggers you risk nothing, and a plan can perfectly well expire without ever being touched.
The entry and the stop: this is where it is decided
These two numbers define your risk, and nothing else does. The stop is the price at which the hypothesis is wrong. Not the price at which it gets uncomfortable: the price at which the reasoning that produced the plan no longer holds.
From which a rule follows mechanically: the stop goes first, the size is computed second. A wide stop forces a small size, a tight stop allows a larger one, for exactly the same amount risked. That is what makes your positions comparable to one another, and it is covered on our page about risk per trade.
A practical corollary: the size you are shown is almost never a round number. If it were, that would be the sign it had been chosen before the stop rather than after.
Several targets mean several orders
A plan often carries several targets, and this is the most misread part of it, because people assume the furthest one is what to aim for and the others can be ignored.
The first thing to know is mechanical: one order carries one target. Aiming at three levels therefore needs three orders, sharing the same entry and the same stop. Nothing obliges you to take them all, and keeping a single target is a perfectly valid choice, provided you decide it before entering rather than along the way.
The second is the most expensive to ignore. Three orders each carrying the size computed for your risk do not risk that amount but three times it, since they share the same stop and will fall together. The size is split across the targets, it is not copied.
It is also why a result announced target by target says nothing about what anyone actually made: it all depends on how they split their size.
What to check before accepting a plan
Three checks, in this order, and they take a few seconds.
- the instrument analysed is the one you meant, and not a neighbouring variant your broker offers;
- price has not moved enough to make the entry obsolete since the analysis was produced;
- the amount at stake, in cash and not only as a percentage, is an amount you accept losing today.
The third is the one most often skipped, because a percentage is abstract where a sum is not. Looking at the real amount before clicking changes a lot of decisions.
A plan is still a hypothesis
Everything above describes a rigorous reading of a chart, not a prediction of what will happen. A well-built plan can fail, and regularly does: that is exactly why it carries a numbered stop from the outset.
The vocabulary used in the analyses is covered term by term in our Smart Money Concepts glossary. Trading carries a risk of capital loss.
If you are wondering more broadly what this tool is and how its analyses are produced, the factual description is on our page what is AlphaGPT.