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Smart Money

Updated on April 4, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Smart Money?

Smart money is the capital or funds under the control of financial professionals and entities, such as central banks, market mavens, and funds. Proficient investors who are able to predict market trends manage the funds and yield the maximum potential profitability.

Smart Money

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It is viewed as investments having a better chance of success because the institutional investors controlling the funds have strategies that diverge from that of retail investors. When central banks control the funds, they can move the markets with force and size. There are different smart money indicators. Index options and stock pricing, and trading volume are two examples.

Key Takeaways

  • Smart money meaning refers to money or capital managed by financial individuals and professionals, such as central banks and funds.
  • The controllers of such funds can predict the market trend and make the best possible investment decisions to generate returns.
  • A key difference between smart and dumb money is that individual retail investors control the latter. On the other hand, the former is managed by financial entities and individuals.
  • Some key smart money indicators are trading volume, data sources and methods, index pricing, and stock options.

Smart Money Concept Explained

Smart money meaning refers to the funds or capital controlled by investment professionals who are more experienced and well-informed than retail investors. Expert financial entities or individuals who can foresee market trends and get the most out of the profits manage the capital. Banks and funds are two examples of such financial entities.

Originally, this term referred to gamblers with vast knowledge regarding the activity they wagered on or had insider knowledge inaccessible to the common public. However, the populace perceives that expert investors allocate the funds to the right investment vehicles at the right time, which leads to the generation of the highest returns.

One can use certain indicators to identify the funds controlled by financial professionals and institutional investors. Let us look at them in detail.

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#1 – Index Pricing And Stock Options

The information on such funds can be obtained by investors who become more informed by analyzing stock pricing and index options. The information from such sources shows how the investors position their future trades.

Hence, anticipating these investors’ positions and the financial instruments they buy and sell would benefit individual retail investors who can take similar positions to achieve their financial goals.

#2 – Methods And Data Sources

Data providers utilize specific data sources and methods to group trading activities into non-informed and informed traders. The analysts utilize data reports from different sources, for example, the Commitment of Traders or COT, to differentiate between commercial and non-commercial trading activities. Such data sources offer insight into both groups’ positions in the market.

That said, one must note that only the investing action cannot be the investors’ full intent.

#3 – Trading Volume

Investors managing such funds invest large amounts strategically, often in organizations that they think will deliver decent performance in the long term. Hence, they must carry out some type of securities’ or derivatives’ volume analysis to find out where the capital generally is or has gone. The funds may move into a position if a stock’s trading volume is unusually high but not because of any public information or industry-related news.

#4 – Insider Buying

Insiders, for example, a company’s board members or executives, are viewed as smart money as such individuals generally have extra information regarding their respective organizations. As a result, when such persons buy equity shares of their companies, they have confidence in the business’s prospects.

#5 – Fundamental Analysis

Investors of such funds typically carry out thorough fundamental analysis, which includes analyzing market trends, financial statements, and management teams.

How To Trade With Smart Money?

There are primarily three signals which individuals can identify in addition to volume and price action to trade using this concept.

#1 – Aggressive Initiation Activity

This refers to a significant movement in a financial instrument’s price, which results from aggressive buyers increasing the price or aggressive sellers lowering the price. This aggressive selling or buying of financial instruments often occurs after an asset trades within a reasonably stable price range without forming a distinct trend.

In this case, informed financial professionals and entities build up positions gradually. After that, they start aggressively purchasing or offloading the financial instrument to move the security prices in the direction of their choice. When the asset’s price moves in a fast trend, they do not have adequate time to place more big positions. Hence, they must accumulate their positions before the move.

#2 – Sideways Price Action Area

Retail investors must seek the sideways price action areas irrespective of the timeframe they are utilizing. Such areas are crucial as informed institutional investors and financial professionals accumulate their positions there. However, one must remember that these areas must be low volume for an existing trend’s continuation.

#3 – Strong Rejection Of Lower Or Higher Prices

A strong rejection refers to an unforeseen price reversal from lower or higher prices. Such a pattern occurs when a security’s price moves in a particular direction aggressively before quickly turning and moving in the opposite direction with the exact aggression.

 In this case, a side of the market, let us say sellers are aggressive. They push the asset’s price in one direction before clashing with the other side, i.e., the buyers, which unexpectedly become more aggressive and stronger. Hence, the security’s price moves in the opposite direction (upwards) quickly as the buyers take over. The area where the strong rejection occurred and the countermove began is crucial as it becomes the resistance or support zone.

Examples

To understand the concept better, let us look at a few smart money examples.

Example #1

A cryptocurrency tracking account named ‘@lookonchain’ identified a smart money wallet that generated a significant profit on its GNX and GMX coins within an hour. It shared that the anonymous whale dumped their GMX and GNX tokens purchased on the Binance exchange around a month back. Per the tweet, the whale purchased 41,302 GMX at $74 each, paying an overall amount of $3.05 million. Later, he offloaded it on the Uniswap DEX at $79 per GMX, making Ethereum worth $2.26 million. The whale’s net profit stood at $214,000.

Example #2

Suppose Matt, who was tracking ABC stock, witnessed that the financial instrument’s price was consolidating for a long duration, and there was no formation of any pattern in the stock chart. He noticed that smart money investors gradually built their positions during this period. Hence, he started doing the same. These investors began purchasing ABC shares aggressively, driving up the market price. As a result, the value of Matt’s holdings increased too. He sold the shares after the significant upward price movement to make healthy financial gains.

Smart Money vs Dumb Money

Individuals new to the world of finance often do not understand the concepts of smart money and dumb money clearly. Yet, one must know their distinct features to comprehend their meaning and avoid confusion. So, let us look at this table highlighting their critical differences.

Smart MoneyDumb Money
Financial entities and individuals control the capital. Examples include market mavens and central banks. Dumb money is the capital controlled by individual retail investors. 
The expert investors managing the funds can predict the market trends and take buy-and-sell decisions at best possible time, generating significant returns. The ’dumb money’ group cannot predict market trends accurately and end up purchasing or selling financial instruments at the worst possible time. 

Smart Money Concept vs Price Action

There are some distinct features of price action and the smart money concept, which individuals must clearly understand to understand their meaning and purpose. So, let us look at the differences between these two concepts.

Smart Money ConceptPrice Action
This is the capital that market mavens, central banks, funds, and other institutional investors manage. Price action is a financial instrument’s price movement plotted over a certain duration. 
Retail investors ride the smart money investors’ coattails to generate returns in the market.  Analysts and traders utilize this concept to analyze market trends and spot the exit and entry points. 

Frequently Asked Questions (FAQs)

How to spot smart money movement?

Individuals may be able to identify such funds when a financial instrument has unusually high trading volume. Still, there isn’t any significant public information or industry news that can generate such volume.

Does smart money concept work in crypto?

This concept works in any market, including cryptocurrency. As a result, one can use the concept to make investment decisions that can generate significant returns.

Where is smart money going?

Because of the economic uncertainty caused by multiple reasons, the funds are flowing into diversified portfolio holdings that can provide institutional investors and financial individuals against the rising prices. Some assets that can help them in their quest are real estate, alternative investments, and private credit.

Is smart money concept profitable?

Yes, it is profitable as the managers of such funds are believed to have more effective investment strategies that diverge from those of individual retail investors.

This article has been a Guide to Smart Money and its concept. We explain how to trade along with examples & indicators and compare it with dumb money/price action. You may also find some useful articles here –