The Roots of PO3, CRT, and Other Smart Money Concepts: Why Elliott Wave Theory is the True Origin of Modern Market Strategies
In the world of trading, there is no shortage of strategies designed to help traders navigate price action. Among these are Smart Money Concepts such as PO3 (Power of Three), CRT (Candle Range Theory), and others like liquidity grabs, market structure shifts (MSS), and order blocks. These concepts have become essential for identifying key points in the market where institutions, also known as smart money, manipulate price.
Why called Elliott Wave: The Source Behind Smart Money Strategies! ? While these strategies are highly effective for traders, it’s essential to understand that they are all derived from a foundational theory that has been guiding market analysis for decades: Elliott Wave Theory. Elliott Wave Theory is the origin of all modern market movements, including Smart Money Concepts. In this article, we’ll explore the deep connection between Elliott Wave Theory, PO3, CRT, and other Smart Money concepts and why recognizing this link will improve your ability to trade successfully.
Elliott Wave Theory: The Foundation of All Market Behavior
Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, describes how markets move in cycles based on crowd psychology. These cycles consist of five-wave impulse patterns followed by three-wave corrections, and this structure applies universally across all timeframes and assets.
The beauty of Elliott Wave Theory lies in its ability to capture the natural flow of the market, reflecting how both retail traders and large institutions interact to create price movement. The five-wave impulse structure (Waves 1, 3, and 5 being impulse waves, and Waves 2 and 4 being corrective waves) reveals how the market trends, while the subsequent three-wave correction (Waves A, B, and C) highlights the retracement of the previous trend.
Elliott Wave Theory is more than just a theoretical framework; it serves as the blueprint for market behavior, from which modern strategies like PO3, CRT, and other smart money concepts were derived.
PO3 (Power of Three) and Elliott Wave
PO3 (Power of Three) is a key smart money concept that describes the way institutional players accumulate positions, manipulate prices, and distribute their holdings for profit. This strategy breaks down into three phases:
- Accumulation: Institutions accumulate positions while the market trades in a range or consolidates.
- Manipulation: Smart money manipulates price by creating false moves, triggering retail traders’ stop losses and generating liquidity.
- Distribution: Institutions distribute their positions, driving the market in the intended direction.
This process is not new. In fact, it mirrors Elliott Wave Theory’s five-wave structure:
- Wave 4 (Accumulation): During Wave 4, the market often enters a consolidation phase, which can be viewed as the accumulation phase in PO3.
- Wave 5 (Manipulation): Wave 5 often involves retail traders entering the market late, thinking the trend will continue. This is where manipulation happens, as institutions push price in their desired direction, similar to PO3’s manipulation phase.
- Wave A (Distribution): After the five-wave impulse, the market enters a correction, starting with Wave A. This corresponds to the distribution phase of PO3, where smart money unloads their positions, causing the market to reverse or enter a new trend.
Both PO3 and Elliott Wave Theory describe the same market dynamics but from different perspectives. PO3 is a refined, tactical way of interpreting the broader principles of accumulation, manipulation, and distribution that are already embedded in Elliott’s wave structure.
Candle Range Theory (CRT) and Elliott Wave
Candle Range Theory (CRT) is another Smart Money Concept that focuses on identifying reversals or trend continuations based on the range of candlesticks. CRT is about marking the high and low of a significant candle and waiting for price action to trigger reversals by grabbing liquidity.
Again, this concept aligns directly with Elliott Wave Theory:
- Bullish CRT: In a bullish CRT model, traders mark the low of a candlestick at support, wait for liquidity grabs below that low, and then enter long trades when price closes back above. This aligns with Wave 4 to Wave 5 transitions in Elliott Wave Theory, where price grabs liquidity before continuing the trend.
- Bearish CRT: In a bearish CRT model, traders mark the high of a candlestick at resistance, wait for a liquidity grab above that high, and then enter short positions when price closes below. This mirrors the shift from Wave 5 to Wave A, signaling the start of a correction after liquidity is grabbed.
Both bullish and bearish CRT models are simply tactical methods of identifying shifts in market behavior, which Elliott Wave Theory already outlines. CRT zooms in on candle-by-candle action, but the principles of liquidity grabs and trend reversals are consistent with Elliott’s theory.
Other Smart Money Concepts and Their Connection to Elliott Wave
Apart from PO3 and CRT, several other Smart Money Concepts are widely used by traders today, and they all trace their origins back to Elliott Wave Theory:
Market Structure Shifts (MSS)
Market Structure Shifts occur when price breaks through a key high or low, signaling a change in trend. In Elliott Wave Theory, these shifts happen naturally at the end of Wave 5 or after Wave C, where the market completes its trend and begins a reversal. MSS highlights this change in market direction, which Elliott Wave Theory already identifies in its broader trend and correction cycles.
ICT Market Structure Shift (MSS) vs. Elliott Wave Theory
Both ICT MSS and Elliott Wave Theory aim to capture market reversals or trend shifts, but they do so using different frameworks:
Order Blocks
An order block is a key price level where institutions place large orders, causing significant reactions in price. These zones often align with Wave 4 or Wave A in Elliott Wave Theory, where the market accumulates or corrects. Order blocks are essentially institutional zones of interest that can be understood as parts of Elliott Wave’s natural retracement or consolidation phases.
Liquidity Grabs
Liquidity grabs occur when price moves beyond a significant high or low, triggering stop losses before reversing. This concept is embedded in Wave 4 to Wave 5 transitions in Elliott Wave Theory, where price grabs liquidity before making a final push. Similarly, Wave A often grabs liquidity after Wave 5 completes, signaling the start of the correction phase. Liquidity grabs are a key aspect of both Smart Money Concepts and Elliott Wave Theory.
Why Elliott Wave Theory is the Origin of All Smart Money Concepts
While Smart Money Concepts provide excellent tools for identifying manipulation, reversals, and institutional actions in the market, it’s crucial to understand that they are all rooted in the core principles of Elliott Wave Theory. Elliott Wave Theory is the blueprint for all market movement, describing how price naturally follows patterns of impulsive and corrective waves.
The beauty of Elliott Wave Theory is its ability to capture the psychology of the market and its participants. While Smart Money Concepts offer tactical approaches to trading, they are ultimately just applications of Elliott’s larger structure. By understanding Elliott Wave Theory, you can grasp the broader market context behind why PO3, CRT, MSS, order blocks, and liquidity grabs work.
Conclusion: The Legacy of Elliott Wave Theory in Smart Money Concepts
In conclusion, Elliott Wave Theory is the foundation of all market movement, including modern strategies like PO3, CRT, and other Smart Money Concepts. The natural patterns of impulses, corrections, and liquidity grabs that Elliott outlined nearly a century ago are still the driving forces behind price action today.
By mastering Elliott Wave Theory, traders can gain a deeper understanding of how the market moves and why certain tactics work. Whether you’re using Smart Money Concepts or any other trading strategy, Elliott Wave Theory is the core framework that makes all these tools effective.
Understanding this connection not only enhances your trading skills but also gives you a clearer view of market behavior, allowing you to trade with more confidence and precision.
