How to Trade with Smart Money

How to Trade with Smart Money

In this article, I will discuss How to Trade with Smart Money with Examples. Please read our previous article, where we discussed Thrust Pullback and Measuring Move Analysis in detail. As part of this article, we will discuss the following three important pointers in detail.

  1. 3 Signs of Smart Money Activity
  2. How to Trade with Them?
  3. Odd Enhancer of Trading
How to trade with Smart Money?

We can spot three main signs of Smart Money activity with Price Action and volume and trade with them.

  1. Sideways Price Action Area
  2. Aggressive Initiation Activity
  3. Strong Rejection (of Higher or Lower Prices)
Sideways Price Action Area

Look for sideways price action areas. Those are very significant places because Smart Money is accumulating its positions there. Always watch for such areas, no matter which timeframe you use. To continue an existing trend, these sideways price action areas should be low-volume.

How to trade with Smart Money

Aggressive Initiation Activity

Aggressive activity is basically a significant price movement. It is caused by aggressive buyers(SM) pushing the price higher or by aggressive sellers(SM) pushing the price lower. This sort of aggressive buying or selling often takes place after a sideways price action activity. What happens is that Smart Money builds up its positions (in sideways areas), and when they are done with that, they starts aggressive buying or selling to manipulate and move the price in any direction they want. This is how they make money. They build up their positions slowly and unnoticed, then start a trend to make those positions profitable.

When the price is moving quickly, there isn’t much time to place any more big positions. For this reason, Smart Money needs to accumulate its positions before the move. Below is an example of sideways price action areas followed by aggressive initiation activity:

Aggressive Initiation Activity

Strong Rejection (of higher or lower prices)

Strong rejection means sudden price reversal from either higher or lower price levels. This pattern is made when the price goes one way aggressively and then turns quickly, with the same aggression and speed going the other way. An example would be a type of candle called the pin bar. But the pin bar isn’t the only visual form of strong rejection. There are many ways a strong rejection can look like. A common sign of all strong rejections is aggression and sudden reversal (2 bar reversal)

One side of the market (for example, buyers) is aggressive and moves the price in one way. Then it clashes with the other side (for example, strong sellers), suddenly becoming stronger and more aggressive. So, the price turns quickly, and the stronger side takes over. The area where the other side took over is significant because it marks a place where strong market participants aggressively rejected the current course of action and started a strong countermove. This place is significant for us because it will most likely be defended again if the price gets near again. It becomes a new support/resistance zone.

Here are some examples of strong rejections:

Strong Rejection (of higher or lower prices)

Remember, places where the price suddenly turned and changed direction are significant. We should always watch out for them in our price action analysis

Odd enhancer for trading
  1. Trading with the trend
  2. Trading from supply and demand or support resistance level
  3. Trading with the dominant pressure

Open the chart, find these three Smart Money activities, and analyze the behavior. This strategy works on all time frames, i.e., from day trader to swing trader.

How to Trade with Smart Money?

Trading with smart money typically refers to aligning one’s trading strategy with the actions of institutional investors or professional traders, who are presumed to have better information, resources, and market analysis capabilities. The term “Smart Money” refers to insiders or individuals with a presumed informational advantage in the market. Here are some strategies to trade with smart money:

  • Follow the Volume: Smart money can often be identified by large volumes, as institutional trades usually involve significant amounts. Look for unusual volume spikes as possible indicators of smart money movements.
  • Track Institutional Holdings: Publicly traded institutions must file reports showing their holdings. Tools like SEC Form 13F can be used to track where institutional investors are placing their bets.
  • Use Order Flow Analysis: Some traders use tools that analyze order flow, which can provide insights into where the smart money is active. For instance, many orders at a particular price level may indicate a potential area of smart money interest.
  • Look for Accumulation Patterns: Smart money may accumulate positions in a particular asset over time. This can often be seen in the price action, where the asset sees gradual increases in price and volume over time, especially during market downturns.
  • Read the Tape: “Tape reading” involves analyzing the “time and sales” feed to see the price and volume of every trade as it happens, which can give an indication of smart money activity.
  • Sentiment Analysis: Smart money is often contrarian. When most retail investors are bullish, smart money may be bearish, and vice versa. Tools like the Commitment of Traders (COT) report can provide insights into these contrarian positions.
  • Technical Patterns: Some technical patterns, such as “head and shoulders” or “double tops and bottoms,” can indicate market reversals that smart money may be aware of or orchestrating.
  • Price and Moving Averages: Watching how prices interact with key moving averages can sometimes reveal the behavior of smart money, especially if an asset’s price consistently respects these levels.
  • Market Internals: Watching indicators like the advance-decline line, market breadth, and others can give clues about whether the wider market supports a move or is just a narrow sector push.
  • News and Events: Often, Smart Money has the resources to act quickly on the news or even before it hits the mainstream. Monitoring news and assessing its impact quickly can help understand smart money moves.
  • Mergers and Acquisitions (M&A): M&A activity can sometimes signify smart money action. A company acquired at a premium can set a bullish tone for that sector or the broader market.
  • Risk Management: Like any trading strategy, managing risks effectively is critical. Set stop-loss orders, only invest what you can afford to lose, and don’t chase the market.

Trading with smart money is not a foolproof strategy and can be risky. It’s based on the assumption that institutional investors are always right, which is not the case. Furthermore, it might be too late to profit from when retail traders identify smart money moves. Therefore, it’s essential to conduct a thorough analysis and not rely solely on the perceived actions of smart money.

In the next article, I will discuss How to Trade with the Supply and Demand Zone in detail. In this article, I try to explain How to Trade with Smart Money with some examples. I hope you enjoy this How to Trade with Smart Money article. Please join my Telegram Channel, YouTube Channel, and Facebook Group to learn more and clear your doubts. 

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