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|Smart Money Indicator|
THE SMART MONEY INDICATOR
USED BY THE BIG DOGS
- ONE OF THE MOST RELIABLE OF TRADING INDICATORS -
If you are trying to qualify the significance of a trend, volume is a key consideration. The presence of high volume could mean that large players are on the field. They are typically better informed than the public. In all likelihood, the trend will continue.
On-balance volume (OBV) is one of the better-known indicators to track volume. It is readily available as an indicator at many of the popular charting sites. What you want to look for here is confirmation of the price trend by the OBV line. Volume should be increasing in the general direction of the trend. A divergence between the direction of the OBV line and the price action foretells that a trend reversal may be in the works.
FIGURE: SILVER - This layout of price bars, OBV line, and volume bars for Silver shows the interrelationships between each of these pieces of data. You will notice the effect that increasing volume has on the magnitude of change, and that net price change only determines the direction of the line. The same concept works equally as well for currencies, markets, stocks, etc. The above chart courtesy ProphetCharts.com.
THE PHILOSOPHY BEHIND OBV
OBV was created by Joseph Granville. His notion was that market participants are divided into “smart money” players and then the “dumb money” crowd – the general public. His premise was that the smart money was able to accumulate at lower prices, before the public woke up, because of their access to more informed information.
Granville’s theory was that, during a bull run, smart money would start it off by bidding prices up. Then, they would only participate in further buying during the first half-to-two-thirds of the move. At that point, they would be fully loaded. Their strategy would be to hold out for the last third of the move, and then cash in their chips at the top. He concluded that this last phase was when the public would start to notice that something was happening and then would jump in. The stage would then be set for the smart money to sell to … guess who? You got it … the public. That’s why they’re called the dumb money.
When the public finally catch on to what is happening, they panic and rush to sell. By then, the market has already turned bearish and accelerates downward.
Granville invented this technique – using the OBV line to track what’s going on – to mirror the movement of smart money in the marketplace. More importantly, he was interested in knowing whether the smart money was accumulating or distributing.
Accordingly, in order for you to be successful with your trading, you need to embrace this philosophy of the smart money “outsmarting” the other side. The smart money – the elite 10% – need the other 90% to sell to and buy from. Here, we are talking about the uninformed individual trader, who never gets it. Granville's ultimate goal in developing OBV was to provide a method that would enable “informed” trading contrary to the uninformed trader.
There are similarities between OBV analysis and fundamental analysis. Granville's goal was to emulate large traders (smart money). It was thought that they probably possessed fundamental insider knowledge. Quite often, the buying or selling patterns of the informed trader will be contrary to the perceived trend of the market. As such, they can be exploited as a contrarian technical method.
In summary, look upon OBV as a technical reflection of the fundamentals that informed traders use to make their trading decisions with. Once we know what direction the smart money is trading in, we can then trade in the same direction, and thereby prosper without really knowing what is going on behind the scenes.
In actual fact, you don’t really have to know anything about the underlying fundamentals. OBV does it all for you. All you really have to buy into is the concept that price is driven by the smart money, and that there is an indicator that you can use to see where prices are headed based on the actions of this elite group. They are the 10% of traders that consistently make all the money in the markets. They quite literally just reach into the pockets of the other 90% and make off with their share of the spoils. That’s why we call them the “Big Dogs” in this business.
Although the OBV indicator is used here to illustrate how it can be used with commodities - silver in this case - it is quite appropriate to use it with currencies, markets, and stocks as well. The Big Dogs are everywhere.
AND, HERE'S HOW IT WORKS ...
What fascinates technical analysts the most is the interplay between price and volume. To them, volume either confirms or does not confirm price movement by either expanding or contracting.
To smooth fluctuations in volume, and also provide an overall indication of price direction, trader Joseph Granville posited in 1976 that volume should be summed each day according to whether price went up or down. If the price went up from close to close, the day's volume would be added to a running total. If price went down, on the other hand, the day's volume would be subtracted from the running total.
This simple idea turned out to have surprising utility. The most advantageous feature turned out to be its reaching new highs or new lows. Moreover, its treading new ground was seen most easily on a chart.
Volume spikes in light trading stand out sharply. In huge volume, individual factors are washed out. The summing process amasses data from many, many days, thereby minimizing the impact of any one day.
ANOTHER BIG WEATHER SMART MONEY INDICATOR
A DISHY SECRET: BONDS MAY NOT BE SEXY, BUT ...
According to Fortune, the bond market has a dishy secret: Its yield curve is something of a prophet to the stock market. The yield curve shows the relationship between short- and long-term government bond rates. Had you known what to look for, you could have gleaned prescient investment information in early 2000 when the market was robust.
Back then, short-term rates were higher than long-term rates, a rare inversion that almost invariably foreshadows an economic downturn. As at February 5, 2002, long-term rates were much higher than short-term rates - a sure sign that an economic upswing was in the works. The bond market may not be sexy, but paying due attention to it will make you a better investor - and trader.
AND NOW, FOR A TRULY SMART SMART MONEY INDICATOR ...
In commodity trading, conventional wisdom has it that the commercial hedgers and non-commercials (or large speculators) are consistently right, while the small speculators are consistently wrong.
The COT (Commitments of Traders) index is a measure of how the net positions by reporting class compare with a certain number of previous reports, where the net position is defined as longs minus shorts by reporting class.
The COT index allows you to view the net position of each reporting class in relation to its own history, to ascertain if a particular group is aggressively positioned with a directional bias.
The COT indices are number-crunched through proprietary in-house computer software to bring you crystal-clear buy and sell signals. These are all explained in easy-to-understand terms in my internationally-acclaimed book ...
How To Make A Full-Time Income Trading Less Than Part Time
Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of commodity trading rules, a currency trading strategy, or stock market successful trading strategies. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!
Shows you how FAST you can make money when the BIG DOGS make their move - by shamelessly copying this winning group . Even I am STILL surprised by how much power they have over ALL markets - not just commodities futures, currencies, and stocks.
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How To Make A Full-Time Income Trading Less Than Part Time
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Over 76% of our readers have been trading four years or more, while almost 24% have been at it for over 20. Even experienced traders know they have more to learn.
Find out what a blind, three-legged dog with a note tied around its neck could do, even in a market jumping up and down like a kangaroo on speed ...
Find out how the "Big Dogs" got rich and what they are hiding from you ...
Find out what only 10% of traders know ...