Inducing longs and shorts (Inducement) is an important term in SMC trading, referring to the market intentionally luring retail traders into trades in the wrong direction before the market genuinely moves in the expected direction. This phenomenon occurs because smart money (such as institutions, hedge funds, and banks) manipulates market liquidity through triggering stop-losses and creating false signals.
By the end of this course, you will understand:
1. What is inducement and why does it happen?
2. How smart money uses specific patterns to lure retail traders.
3. Common scenarios of inducing longs/shorts.
4. Types of inducement based on structural breaks.
5. How to identify and avoid these traps.
6. How to use inducing longs and shorts as a trading tool to follow smart money rather than oppose it.
▍What is the inducement of inducing longs and shorts in trading?
Inducing longs and shorts is a tactic to attract retail traders into the market and provide liquidity for large funds. It misleadingly creates false breakouts, brief trends, or fake movements to guide retail traders into making erroneous judgments, thereby helping smart money enter and exit the market at more favorable positions.
▍Why does inducement happen?
📌 Institutions need liquidity.
◒ Large institutions cannot enter large trades directly without causing significant price fluctuations.
◒ They create liquidity by encouraging retail traders to enter and setting stop-loss orders at predictable positions.
📌 Retail traders provide liquidity.
◒ Retail stop-losses are usually set below support, above resistance, or at round numbers.
◒ Smart money targets these areas, deliberately triggering stop-losses, then pulling prices towards the real trend direction.
📌 The nature of the market is to seek liquidity.
◒ Prices tend to move towards areas of concentrated orders.
◒ The process of inducing longs and shorts helps prices efficiently complete liquidity filling and conversion.
▍Common scenarios of inducing longs/shorts.
# Inducement can take many forms, but its underlying purpose remains the same—to deceive retail traders into entering the market, allowing smart money to realize its manipulation intentions. When conducting market structure analysis, consider the following common inducement scenarios:
1. False breakouts.
This is one of the most common forms of inducement. Typically, prices will break through key levels (especially support or resistance), enticing traders to enter in the direction of the breakout. However, once the market attracts enough liquidity, prices will quickly reverse, causing these following traders to get stopped out.
2. Liquidity-area inducement.
Inducement often targets 'Liquidity Pools', which are areas in the market where a large number of stop-loss orders or limit orders are easily triggered. For example, above a resistance level or below a support level, smart money may intentionally push prices toward these areas to 'harvest' liquidity, after which the price reverses.
3. Order blocks can also be areas of inducement.
This point is particularly crucial and traders should focus on understanding it. Sometimes, an apparently standard order block is actually an inducement trap. Especially after a structure is broken, the initial order block during the first pullback is often viewed as a valid entry signal area, while in reality, smart money may be using this market consensus to manipulate in the opposite direction. In other words, this order block may not be a true institutional buy/sell area but rather a trap to induce retail traders to enter, making it easier for them to get stopped out.
The essence of inducement is to create false impressions, guiding traders to enter incorrectly, thereby allowing smart money to acquire liquidity and control market rhythm more easily. Understanding and identifying these common inducement scenarios is a key step to improving trading skills.
▍How do institutions deceive retail traders?
1. Stop-loss sweep—triggering retail stop-loss orders.
◔ Retail traders often set stop-losses below support and above resistance.
◔ Smart money will push prices through these key positions, triggering stop-loss orders.
◔ Once liquidity is 'harvested', prices will quickly reverse back to the original direction.
How to avoid:
◔ Avoid placing stop-losses at obvious positions.
◔ Pay attention to liquidity raiding behavior (such as quick spikes breaking support/resistance and then swiftly reversing).
◔ Wait for confirmation signals of price reversal before entering trades.
2. False breakouts—enticing traders to enter the wrong trend.
◔ When a resistance level is formed, traders expect the price to break upwards.
◔ Prices briefly break resistance, triggering buy orders.
◔ The market quickly reverses, stopping out the traders who chased the price up.
How to avoid:
◔ Never chase orders immediately after a price breakout—wait for a retrace confirmation.
◔ Use higher time-frame charts to confirm the validity of the breakout.
◔ Pay attention to 'inducement spikes' (prices briefly piercing key levels before quickly retreating).
3. Inducing trend traders—creating false trends.
◔ Institutions create false trends to mislead traders into thinking the market is moving in a certain direction.
◔ Once enough traders enter, smart money suddenly pushes prices in the opposite direction.
How to avoid:
◔ Don't blindly chase prices—patiently wait for a price retrace to key areas such as order blocks (Order Block) or fair value gaps (FVG).
◔ Check for divergence—such as prices rising but technical indicators showing weakness, which may indicate a false trend.
◔ Combine multiple technical confirmation signals before entering.
4. Liquidity inducement before a real trend.
◔ Before a real trend starts, smart money often first misleads the market in the wrong direction to 'harvest' liquidity.
◔ Prices move towards key areas, attracting traders to enter.
◔ Subsequently, smart money clears out stop-losses and limit orders and quickly reverses to start the real trend.
How to avoid:
◔ Identify areas of liquidity concentration in the market and wait for signals of intervention from smart money.
◔ Observe changes in market structure—if the price first breaks below a key low and then quickly rebounds, it could signal that liquidity grabbing has been completed.
◔ Wait for the price to test a strong support area (like an order block) before considering entry.
▍Identification of inducement behavior in trading.
Understanding inducement is a crucial concept in trading, especially when inducement areas appear in order blocks during the first pullback after a Break of Structure (BOS) or Change of Character (CHOCH). To effectively identify and understand inducement behavior, it is essential to grasp several key market structure concepts such as 'Valid Pullback', 'Break of Structure (BOS)', and 'Change of Character (CHOCH)'. These elements play a core role in distinguishing real market trends from false moves that induce retail traders to enter.
1. Valid Pullback: A retracement phase within a trend, part of the trend correction phase, where the price briefly diverges from the main trend direction and then resumes its original trend.
2. Break of Structure (BOS): Refers to the price continuing to move in the direction of the trend instead of reversing. However, not all breakouts are real, which is where understanding inducement behavior becomes crucial.
3. Change of Character (CHOCH): Refers to a change in market structure where the trend no longer continues and a reversal occurs. Identifying inducement in this context helps traders avoid being misled by false signals.
In short, these three concepts are key to understanding market structure and identifying inducement behavior within ranges.
▍Types of inducement based on structural breaks.
Inducement can mainly be analyzed and identified in two structural contexts: after a Break of Structure (BOS) and after a Change of Character (CHOCH).
After a BOS, the market typically experiences a pullback and then continues in the direction of the breakout. Many retail traders view the order block during this pullback as an entry opportunity, thus following the trend.
However, if this pullback is part of an inducement strategy, smart money may deliberately push prices toward these positions, enticing retail traders to enter before moving in the opposite direction to complete the harvesting. To identify such inducement, one must judge whether the pullback is an effective pullback or merely a trap to induce retail traders to enter.
After CHOCH (Change of Character), inducement usually occurs during the first pullback after the market structure has just reversed. At this time, the first pullback is often designed as a trap, aiming to mislead retail traders into believing the old trend will continue, thus inducing them to trade along the old trend while the market is actually preparing to move in the opposite direction.
To identify inducement in this situation, traders should review the price action leading to the occurrence of CHOCH, looking for effective pullbacks. This pullback is likely an inducement area where smart money induces retail traders to enter before reversing to establish a new trend.
Identifying inducement in market analysis can be leveraged. We just need to wait for the price to reach the inducement area, and after liquidity has been 'harvested', enter according to our trading plan. By understanding and identifying these key concepts, traders can more clearly judge whether they are being induced by the market, thereby avoiding common traps.
▍How to leverage inducement behavior to gain an advantage.
1. Look for liquidity areas before trading.
⊜ Identify areas where smart money may want to acquire liquidity.
⊜ If you plan to go long, wait for the price to retrace to the liquidity pool before entering.
⊜ If you plan to go short, wait for the price to spike to the liquidity area before entering a short position.
2. Wait for a change in market structure (MSS).
⊜ Market Structure Shift (MSS) indicates that smart money has completed the inducement and traps on retail traders.
⊜ If smart money clears out liquidity and then breaks the original structure, it indicates that a real trend is about to start.
⊜ Always wait for the price to retrace to strong support/resistance areas before entering.
3. Combine inducement with order blocks and fair value gaps.
⊜ When inducement occurs near order blocks or fair value gaps, trading signals are stronger.
⊜ If the price retraces to the order block after inducing retail traders into the wrong direction, this is a high-quality entry opportunity.
⊜ If there is a fair value gap near the inducement area, the price is likely to fill the gap before continuing the original trend.
▍Conclusion.
Inducement is a powerful concept that can distinguish losing traders from profitable ones. Rather than getting trapped in inducement traps, it is better to learn from smart money's trading methods and gain insight into how institutional funds manipulate the market.
Understanding inducement and its relationship with market structure is crucial for synchronizing operations with institutional funds and avoiding falling into retail traps. Always focus on 'Valid Pullbacks', 'BOS', and 'CHOCH' when analyzing the market to identify potential inducement areas.
Please note that cryptocurrency trading carries high risks, and past performance does not guarantee future results. Before engaging in live trading, ensure you fully understand the risks and adopt appropriate risk management strategies.
▍Common questions.
1. What is inducement (Inducement, IND) in trading?
Inducement refers to a behavior in which institutional traders manipulate price behavior to lure retail traders into the market, leading to their trading failures. This often manifests as triggering stop-loss orders or creating false breakouts.
2. Does inducement only exist in the cryptocurrency market, or can it occur in all financial markets?
Inducement phenomena can occur in all financial markets, including forex, stocks, commodities, and cryptocurrency markets. The principles of market structure and smart money manipulation are universally applicable across different asset types.
3. Is inducement always intentional by institutional traders?
Inducement is not always an intentional act, but it often results from institutional traders' need for liquidity. Their large orders can impact price movements, which often misleads and traps retail traders, regardless of whether the outcome is intentional or unintentional.
4. How to identify inducement behavior in the cryptocurrency market?
To identify inducement behavior, one needs to analyze key market structure elements like 'Valid Pullbacks', 'Break of Structure (BOS)', and 'Change of Character (CHOCH)'. Inducement usually occurs near these structural key points because these positions are most likely to attract retail traders and lead to their entrapment.