What is Smart Money ?
How to trade with Smart money is one of the major topic that we need to understand to know the footprint of big investor. Smart money means the funds of intelligent institutional clients, experienced stock market traders, central banks, and stock market professionals. The term “Smart Money” originally originated from betting where it used to refer to money that was staked by SHARP money makers.
The Smart Money Concept (SMC) focuses on the principle that the price movement of Big institutional investors in financial markets can offer valuable idea or clue to retail traders like us about future market trends.
Other points to remember concerning Smart Money are highlighted as follows:
- It is the capital invested by big people such as institutional buyers, market analysts, central bank, funds, and financial gurus.
- Smart money means that smart people are involved in and influence financial markets.
- Sometimes, its movements depend on the actions of central banks more often especially in the developed world.
- Smart money entails much higher investment compared to the amount that is invested by the smaller investors.
How to trade with Smart Money?
By observing Price Action and volume, we can look for three things in order to use Smart Money trading techniques.
- Lateral movement is usually associated to Smart Money activity.
- As an indicator of Smart Money participation, wait for a strong move (buying or selling) within the start of a directional trend.
- When prices are very much anchored and have a lot of resistance to go up or down, Smart Money is active. Strong rejection at the vicinity of the support and resistance levels.
Sidewise area – need to mark those zone shown in below image and monitor
In particular, try to identify when the price range becomes narrow, or it forms a congestion zone. These are the most significant periods because those are the periods when Smart Money starts to accumulate their stakes. Regardless of the period under consideration, watch sideways movements in the price action. However, for an ongoing trend to be established, the sideways periods should always have low trading volume. Knowledge of sideways price movements and their identification as observed or implied by Smart Money is therefore critical in the context of the present study. It is about finding such conditions at which some key players start to amass their stakes in anticipation of altering the market situation.
Aggressive Movement ( Buying/Selling)
Active price change means a shift by approximately 25 percent or more in either direction, up when supported by the Smart Money or down due to the Smart Money. This kind of forceful buying or selling is common after a period the price has been range bound.
Here’s how it works: Smart Money remains passive during the sideways movement and starts accumulating an increasing quantity of the shares they want to buy/sell as soon as they want to manipulate the stock price in a certain direction. This is how they earn money. They gradually and inconspicuously marshal their stakes and then they form a trend to make those stakes lucrative.
When there is such price fluctuation, Smart Money cannot make large transactions because the change happens too quickly. Thus, they gather their positions before the time of the huge change in the price. As an example: first you are able to identify a lateral movement of price on the chart, and then observe a sharp price movement, which is the initiation activity of Smart Money.
Strong Rejection near Support/Resistance Levels
Strong rejection refers to a sharp movement in either direction of the price which is either up or down. Let me give an example of a candlestick pattern called pin bar, but it comes in several forms in which strong rejection can present.
Here is the Smart Money Concept: One side of the market for instance buyers, exerts a significant amount of pressure to change the price in a given direction. Then it encounters the other side (like strong sellers) and at once it gets more powerful and forceful. Thus the price turns sharply, the other side takes over. The location where this reversal occurs is crucial because it reveals where effective market forces significantly deviated from the current trend. This place matters to us because it will probably be supported if the price gets close once more. It turns into a new level of support or resistance.
How potential Smart Money partners can approach us ?
Trading with smart money therefore is all about imitating the actions of institutions or large shareholders classified as wise money. These are people who are believed to have better information and analytical instruments. Smart money therefore denotes an individual who has better information than all the other players within the market. Here are some ways to trade with smart money:
Follow the Big Trades: Smart money generally refers to large volume activities conducted by professional investors. Some of the things that you should be looking at include such things as increased trading volume, which may well mean that these large players are gearing up to make some major moves.
Watch for Steady Increases: For instance, smart money basically and gradually buys stakes in its investments. This can be evidenced by gradual smoothening of price and volume profiles specifically during periods of market contractions.
Check Sentiment: Smart money is always on the opposite of the herd. The extreme of most people’s positive is negative and the extreme of negative is positive. Such reports as Commitment of Traders can reveal these contrarian methodologies.
Look for Patterns: Some formations in the market, which are such as ‘head and shoulders’, ‘double tops and bottoms’, are likely to reveal the presence of smart money.
Stay Updated on News: Information is power and smart money reacts well to them. This means that one should be able to follow all the news and how they affect them in order to understand their next course of action.
Mergers and Acquisitions: Smart money may be participating in mergers or acquisitions hence impacting on a given sector or the market in general.
Manage Risks: As any trading strategy, risk management issues are critical. More importantly, set stop loss orders, invest smartly and avoid getting tempted to buy at the wrong side of the market.
Just a reminder: trading with smart money is not perfect and can be dangerous. It assumes institutional investors are always right and this is not a correct assumption to makes. It may also be too late to enter a trade once all sorts of retail traders see the signals indicating that smart money is active in a particular asset. Therefore, analyze and do not be a slave to the so-called smart money movements only.
Conclusion
What trading with smart money or Smart Money Concept means is to follow the actions and operations of the big institutional investors, who control the processes in the markets. This way, by focusing on some basic concepts as liquidity zones, order blocks, and markets structures, a trader is able to gain an important advantage in the way he/she interprets the markets. But smart money trading is not an exemption when it comes to discipline, patience and learning. Take care to integrate technical information with good risk management so as to protect your capital. If regular practice is incorporated with the knowledge of the market conditions then the usage of smart money strategies can be applied to help boost your trading performance and create sustainable success.