TRADERS DAILY

HOW THE SMART MONEY OPERATES

      They buy cheap and sell when prices are high! Its obvious isnt it? Thats the best way to make money, everyone knows that, even if they know nothing else about the markets. Obvious, yes,simple even, but not easy for you and me though. After all,how do we know when prices are cheap? or expensive? The price might look cheap today but what if it goes down tomorrow?  Should i buy some more then? So how does the smart money know when to buy or sell...what makes them so....smart?!

Well, for a start, they probably have access to inside information that we dont have. They  know how the market will probably react to a piece of news before its released and position themselves accordingly. For example ,lets say some bad economic figures come out and the market tanks,the smart money would not be left holding the bag ,having already sold before the announcement.They may even have pushed the market higher hours in advance having accumulated their stock much earlier on .  (when it was cheap, naturally)  Its not just the fact that they know where prices are going ,but also they know exactly what to do when the price gets there. In this example that would mean accumulating lower down, buying into the panic in other words. Now when all those sellers were selling the last thing on their minds as their stops were getting hit and they were getting out was- who is buying, who is on the other side of my trade? It takes 2 people to complete a trade 1 buyer,1 seller. Problem is though,they have no choice if they got in near the top.Those that got in earlier would have taken their profit either when the price started to drop or before the figures came out, not wanting to expose themselves to risk ahead of the announcment. The market can be very volatile if the figures dont meet expectations which have already been priced in.

Now, when you look at a chart you will see that price never goes up or down in a straight line. If the trend is long price will go up until it meets resistance where it will go sideways.Resistance means supply (selling). Those in profit may be selling here and there will be short sellers hoping price will go down so they can buy back cheap to close their position. If the smart money is long, intending to push prices higher, they will need to absorb this supply. Once this supply has been removed price will breakout above this sideways congestion area. You do see false breakouts but if price moves quickly it usually confirms that market makers know that the smart money is buying and have marked up prices accordingly. Thats because they can see both sides of the order book and can see the demand (buying) So price moves according to supply and demand. Once price has been marked up the short sellers are now trapped. They must now buy back and cover their short positions or face further losses.When they do, it is called capitulation and it will add to the momemtum pushing the price even higher . Meanwhile those on the sidelines waiting to see which way the wind blows will now be buying into the move, again pushing the price up further until it meets a new, higher resistance level where it will go sideways again.

HOW TO FOLLW THE SMART MONEY

       We have seen that when the smart money is buying ,resistance is broken. If they had been selling ,the support would have failed, in which case price would move down ,sideways ,down. So, in our last example we were going long and the price will continue going higher until the professionals are ready to dump their stock into this rally. Those taking profits along the way are ok but anyone trying to call a top and go short will get their ass handed to them, as we say in the business.If we were going short, anyone trying to call a bottom too early by buying into the sell off will also get their ass handed to them.Thats called trying to catch a falling knife.

        One of the reasons the smart money appear to call perfect tops and bottoms is to do with the size of their positions. Lets imagine you are them. Lets say you decide prices are cheap and you want to buy 100,000 shares/options/futures or whatever you trade in. What do you think your biggest problem is going to be? Bear in mind that buying means demand. What did the market makers do when they saw big demand orders on the the buy side of their order books? Thats right, they marked the prices up.After all theyre in business too so why should they let you get them cheap when they know that the price is going to go up? You want to buy your 100.000 shares as cheaply as possible and just as you want to buy ,the price is going up because the size of your order compared to the little guy lets the cat out of the bag. What do you do? The answer is you have no choice but to buy in several smaller instalments, break the order up. The market maker still knows youre buying but he cant see the entire order so the mark up will be less.You will get your first order filled at 55p the 2nd at 57p and so on. So you have to buy when prices are falling and when they are really cheap because nobody wants them. Thats why the price is falling, everybody is selling because they think its going to keep going down. The fact that you are buying in size means its not going to keep going down. In fact, by the time your last orders go through, you and the rest of the smart money, are supporting the price. Hence price bottoms out and finds support. And the reason everyone is selling to you now is because 2 weeks ago YOU were selling.Because of your size, you forced the price down, selling to all the little guys who thought it was going up! The rising price and big trading volume figures fooled the little guy into the wrong side of the market. He couldnt see your hidden selling disguised in that big volume as you sold at higher prices!