This is one of my favorite topics in all of investing. I can’t really explain it, I just think it’s cool.
I first learned about smart money by watching a video on YouTube that will be featured later in the post. Basically, smart money is comprised of all the big dogs of trading: mutual funds, hedge funds, incredibly wealthy people (Warren Buffett).
These people are throwing around millions upon millions of dollars and are the wave starters. They get in a stock, it begins to gain momentum as people start to notice it rise, and then it becomes the hot stock that everyone wants.
The good news is there is a way to tell when the smart money makes its moves: volume! The majority of the time, if you just look at price, you can never tell which days are significant and which aren’t. The way to apply importance to each day is to take a look at how big the volume was (the bigger the better). Take a look a couple videos and then I will explain a little further.
Here’s a chart for some more explanation:
Click To Enlarge
I’ve got three areas marked on the chart:
- Here we have a top and you can see the two days of importance. In real time, this day wouldn’t appear very significant and a hold would still be in place on all positions. The next day is the one that counts. We have a huge sell-off as volume spikes and the market pulls back almost double the day before. The second day is when the smart money sold out of the market. You can see what happened next.
- Next, we have a bottom with two significant days. The first is the true bottom. In real time this would be your alert that the smart money had bought in as volume spikes and the market pulls back almost completely from lows. The buy signal is the next day when the market continues to thrust upward on ultra-high volume.
- The last area of concern is another top with three days of importance. This case is different than the others because there is no volume spike. We actually got the opposite: low volume. The first day would carry a hold rating as the market finished at the highs, but on below-average volume. The next day would draw the flag as the market pulled back off highs and finished over 3/4 of the way into the previous day’s range. Finally, you would get the sell signal from the third day as the market pushed into new highs and then fell back down on above-average volume. This shows a lack of demand and that the rally cannot last any longer.
Now this is not an easy topic to understand. It takes a lot of time devoted to analyzing previous tops and bottoms to be able to use this in the market. Start off by looking for ultra-high volume. This will be the easiest to spot and the easier situations to analyze. The trickiest is when you get low volume because only after the market makes a portion of its moves can you see if it was a top or bottom.
The biggest thing here is to practice and never stop learning.
Please comment with any questions. I’d be happy to clear up any confusion as best as I can!
You also might enjoy:
About Author
