How to Trade with Smart Money
In this article, I am going to discuss How to Trade with Smart Money with some examples. Please read our previous article where we discussed Thrust Pullback and Measuring Move Analysis in detail. As part of this article, we are going to discuss the following three important pointers in detail.
- 3 sign of Smart Money activity
- How to trade with them?
- Odd enhancer of trading
Before going forward let me remind you that, this is the 2nd part of how to trade with smart money. So please read the first part of how to trade with smart money article before proceeding to this article.
How to trade with Smart Money?
There are three main signs of Smart Money activity which we can spot with Price Action and volume and can trade with them
- Sideways price action area
- Aggressive initiation activity
- 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 are accumulating their positions there. Always watch for such areas, no matter which timeframe you use. FOR continuation of an existing trend these sideways price action areas should be low volume
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) who are pushing the price lower. This sort of aggressive buying or selling often takes place after sideways price action activity. What happens is that Smart Money is building up their positions (in sideways areas), and when they are done with that, they start aggressive buying or selling to manipulate and to move the price in any direction they want. This is how they make money. They build up their positions slowly and unnoticed, and then they start a trend to make those positions profitable.
When the price is moving in a fast trend, there isn’t much time to place any more big positions. For this reason, the Smart Money needs to accumulate their positions before the move.
Below is an example of sideways price action areas followed by 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 and with the same aggression and speed goes the other way. An example would be a type of candle called the pin bar. But pin bar isn’t the only visual form of strong rejection. There are many ways a strong rejection can look like. A common sign for all strong rejections is aggression and sudden reversal (2 bar reversal)
What happens is that 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) which suddenly becomes even stronger and even more aggressive. So the price turns quickly, and the stronger side takes over. The area where the other side took over is very significant because it marks a place where strong market participants rejected aggressively the current course of action and started 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:
Remember, places where price suddenly turned and changed direction are very significant. We should always watch out for them in our price action analysis
Odd enhancer for trading
- Trading with the trend
- Trading from supply and demand or support resistance level
- Trading with the dominant pressure
Open the chart finds these three Smart Money activities and analyzes the behavior. These strategy works on all time frames i.e. from day trader to swing trader