It’s a given that the financial markets always need more losers than winners. And while using technical or fundamental analysis gives the illusion of explaining what is happening in the market, it’s really that much-overlooked volume histogram at the bottom of your chart that holds the key to being on the winning side more often. Read on to discover how to gain a competitive edge by following the smart money.

What is the smart money?

The term ‘smart money’, when referring to the financial markets, was first coined by Tradeguider CEO Gavin Holmes when writing his 2011 book ‘Trading in the Shadows of the Smart Money’ (the ebook for which can be found on our eBook library).

But the concept has been around for as long as the financial markets themselves. Active in the early 1900s, Wall Street trader Richard Wyckoff originally delineated the idea of the ‘composite operator’ as the true force behind market shifts. He defined these players as being those trading contracts large enough to change the direction of the market. Because of the amount of money that this entails, smart money operators make up 80-90% of the volume (or trading activity) in the market. And because they can see all the buy and sell orders, the stop-loss orders, etc, they can identify the windows of opportunity better than the uninformed trader.

It’s a red herring to try and identify exactly who the smart money players are – so many traders and investors are never reported. The key is that the smart money is always trying to outwit the rest of the market through deliberate market manipulation.

How does the smart money manipulate the markets?

There are various ways that the smart money can manipulate the markets, such as a carefully-timed question on an earnings call that suggests doubt in the company’s performance or the manipulation of press coverage more directly. Company directors won’t know why their stock’s price has dropped one day to the next when the underlying fundamentals of the company are consistent.

But smart money operators don’t buy or sell on company fundamentals or technical analysis. They buy when they’ve manipulated the rest of the market to sell and sell when the rest are buying.

They sell even if the news is good, the market is rising and others are buying, because they’ve prompted that very market movement. This is done over the course of weeks or months to better hide their strategy.

In Wyckoff’s book, ‘The Richard D. Wyckoff Method of Trading and Investing in Stocks – A Course of Instruction in Stock Market Science and Technique’, he observed the following:

‘You have often noticed that a stock will sell at the highest price for many months on the very day when a stock dividend, or some very bullish news, appears in print. This is not mere accident. The whole move is manufactured. Its purpose is to make money for inside interests — those who are operating in the stock in a large way. And this can only be done by fooling the public, or by inducing the public to fool themselves.’

Here Wyckoff specifically mentions some of the tactics used by the marker manipulators:

‘These players are not listening to news, gossip, opinions or their own prejudice. When he [the composite operator] wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers.’ (Source: The Financial Post).

How can I detect the activity of the smart money?

Wyckoff might have been writing nearly 100 years ago but his observations are just as valid today. Everyone knows that the markets are moved by supply and demand. The key is to identify the most important supply and demand on the chart: that of the smart money mover.

The Wyckoff VSA method can track their plays by cross-referencing volume (activity) on an instrument, the price spread of the bar, and the closing price on that bar, across multiple time frames.

Using the Wyckoff VSA trading method to trade in harmony with the market movers

Wyckoff VSA is a three-dimensional way of looking at the market. It’s an objective way to ascertain what the market is really going to do. Where technical analysis and fundamental analysis could be likened to looking at the sky to predict tomorrow’s weather, Wyckoff VSA is looking at the weather forecast.

In practice, for instance, when using our SMART Center product, this means you can get Wyckoff VSA indicators that identify signs of accumulation and distribution relevant to your overall trading strategy.

Using this kind of trading software, you can track the activity of the force behind the otherwise seemingly random moves in the market, and trade in harmony with it. Without this perspective on market activity, it is unlikely that you’ll be on the winning side of the trade.

Summary: Gain a competitive edge with Wyckoff VSA

Wyckoff VSA has been the profit takers’ best-kept secret for years now, and many of your competitors will be overlooking its power. Incorporating Wyckoff VSA strategies and implementing dedicated VSA trading software allows you gain a vital edge over traders who either don’t know about the importance of volume or know it’s important but aren’t sure how to use it.

Are you interested in learning more about detecting the activity of the smart money? You can get plenty of handy resources on Wyckoff VSA in our Free Resource Center and on our blog. We also have lots of insightful videos, including live trading sessions, on the Tradeguider YouTube channel.

Book a Wyckoff VSA software demo

Our SMART trader software is powered by automation and the principles of the Wyckoff VSA methodology. If you’d like to see our software in action and get a sense for how it will help you identify and manage trades to stop missing market tops and bottoms, exiting the trades too soon, or avoid excessive drawdown, why not book a free demo session? During the online session, we can do some live trades in your chosen market and show you how methodology will help you find the consistency you’re after!

Tradeguider is the home of Wyckoff Volume Spread Analysis, the methodology with a 100-year pedigree that the smart money traders don’t want you to know about. Over 4500 customers have benefited from our advanced trading system, which combines the key Wyckoff VSA principles with our game-changing SMART Technology, helping them to increase profits, improve consistency and trade in harmony with the smart money. Explore our great range of supporting services for traders.