How Far Can You Go With Smart Money Trading?
Trading with “smart money” involves large sums of capital that are under the control of institutional investors and hedge funds. Because of their knowledge and experience, they are able to invest in financial securities with high accuracy.
It is simple trading, but on a higher scale and with the right hands. Multi-million dollar investors prefer to get smart with money to grow their income further and enjoy their impact on the market.
Retail traders have a love-hate relationship with smart-money investors, as their decisions can sway the entire market, impacting retail traders significantly. Conversely, numerous retail traders monitor and emulate smart money trading to generate profits for themselves. So, if you want to follow smart money, read until the end of this article.
- Smart money refers to capital controlled by institutional investors, hedge funds, and central banks and invested in financial markets.
- Smart money traders utilise their significant experience, market knowledge, and insider information to conclude successful trades.
- Retail traders can identify and track smart money trading incidents and utilise this information to make informed trading decisions.
Understanding How Smart Money Works
Smart money entails the money and funds that big investors control and invest, and, as a result, highly impact and move financial markets. They are usually central banks, institutional investors, hedge funds, and significant market makers with sufficient market experience and share.
This term was first used in gambling when players used to trust their money with an experienced gambler to wager their money. These professional gamblers had the know-how, insider news, and information the public could not access. Similarly, traders invest in different markets using smart-money investors simply because they are more experienced and have internal insights that retail traders do not know, resulting in successful trades.
Additionally, traders trust smart money investors because their investments are worth millions or even billions, which is enough to move the market in their favour. Therefore, their chances of having successful traders are higher than those of other market participants. Consequently, retail traders observe these activities to draw their retail trading strategies.
How to Track Smart Money
The good news is that the market structure and dynamics allow retailer traders to observe and track these smart money investments. However, it requires deep knowledge of financial markets and in-depth analysis of markets like Forex, crypto, commodities, bonds, or stock market.
Here are some signs that indicate institutional smart money trading.
- Significant investments: Institutional investors execute market positions in huge amounts. Therefore, you are more likely to watch a smart money trader transacting millions of dollars at once, indicating a smart money trading activity.
- Locating growth potential: Smart money investors rely on prospective niches and growing markets or sectors that have huge potential. Therefore, you can focus on these areas that attract smart money holders.
- Insider trading: Smart money investors have access to huge corporations either by direct connection because they work there or indirectly through their network. Therefore, when a smart money trader buys or sells shares of their firm, this can be a prominent indicator of a decent trading opportunity.
- Long-term investment: Smart money investors tend to hold their trading position for an extended period and watch their investments grow, which is a sign of smart money trading.
Early Signs Of a Smart Money Activity
Tracking smart money trading helps retail market traders identify potential market directions and draw speculations. However, there are some ways to identify these market trends before they occur using the following tactics:
Analysing CFTC Reports
SEC demands institutional investors to report their future contract positions before executing them. These “Committments Of Traders” hold essential information about possible smart money trades.
Quarterly 13F Reports
Large investors and institutions that hold assets worth more than $100 need to document their publicly traded assets and securities quarterly. These reports can reveal some clues about significant investments, indicating smart money investment strategies.
Market Sentiment Analysis
Smart money investors consider market sentiment and news before making a move. Retail traders may depend on this to understand the overall trajectory of the market.
Trading Volume Analysis
Smart investors execute market positions with huge capital, creating a sudden price action which other financial professionals can detect. Traders can conduct in-depth volume analysis over several financial assets and copy these strategic investments.
Hedge Funds Report
Smart money investors include hedge funds, which invest significant capital in several financial markets. Several reports track hedge fund holdings, entailing the investments the fund invests at and the amounts. Traders can use this information to predict price action and create their trading strategy.
Insider Buying Reports
SEC provides publicly accessible insider buying and selling activity. Retail traders can use these reports to identify the stocks internally bought and sold in the financial market, indicating smart money trading.
Smart Money vs. Dumb Money
The smart money concept may seem a complex term, but in its essence, it is trading with massive amounts using experienced and deep-pocket institutional investors and market makers. Opposite to smart money, dumb money is another concept that suggests that money is traded with market participants who do not have a similar market experience or inside knowledge.
Smart money investors have an in-depth familiarity with the market structure and commit massive sums of money to investments. Contrarily, dumb money is often in the hands of retail traders who rely on tried-and-true techniques. Experts in the market manage smart money investments by looking at the market and internal news to determine when it is the best moment to make an investment. However, individual traders cannot access this vital information during peak trading hours. Thus, their capital may suffer a loss or generate lower returns than it would be possible using tactics preferred by the smart money.
Traders put their faith in smart market investors because they have a better track record of making money in the markets and can accurately forecast when and which assets will perform well. It has been argued that institutional investors unfairly benefit from market manipulation and hurt small investors. Retail traders, however, may learn from the activity of professional investors by monitoring their trades, identifying the strategies used by the pros, and modelling their own behaviour accordingly.