One of the most common terms that works a lot in the financial market and when investing in various assets, including cryptocurrencies, is smart money. In this article, we are going to mention a brief history of this concept and teach identification methods and how to use it. We also provide you with information about ignorant or dumb money so that you can easily use this indicator in investing and reduce the possibility of error significantly.
A brief history of smart money
It is better to define the term smart money or Smart Money Let’s talk briefly about its history. This term was first applied to gamblers who had acquired deep experience and knowledge in a particular field of betting. The skill of these people was such that they could easily predict the winner and loser with the information they obtained; While ordinary people were not able to do such a thing. So it can be said that the term smart money used by investors in the financial markets is called gambling.
What is smart money? Its definition in financial markets
What is the function of smart money? In financial markets, this money is referred to as capital that is invested by experienced and knowledgeable people into a specific asset. These investors can be natural or legal persons (investment institutions, central banks or financial institutions). By gathering information and analyzing carefully, these people predict the market trend and get the most profit from different markets by properly managing their assets. This is the reason why many financial market activists believe that in order to identify a bull market and a bear market, it is necessary to identify the behavior of these people, whose decisions determine the direction of the market.
It is possible to enter smart money into the market at any hour of trading; Because this money buys and sells an asset based on a predetermined strategy.
Ignorant and dumb money and its definition in financial markets
The opposite of smart money can be called dumb money. In the term, the capital that investors without experience and knowledge enter into a market is called dumb or ignorant money. Due to the lack of sufficient knowledge, these people are not able to identify the trends and determine the beginning and the end, and most of the time, they lose a significant amount of their capital when buying and selling an asset. Note that investors with a large amount of assets can also fall into this category.
Let us make this clear with an example:
Suppose a person has a lot of experience and knowledge in the field of buying and selling property, so he easily buys and sells property at the right time and earns a good profit; But the same person enters a part of his capital in the cryptocurrency market or stock market and loses a significant part of his capital due to lack of experience and knowledge. So, when identifying smart money, don’t just pay attention to the size of the capital (although this issue has a significant effect) and you should have a special look at the knowledge and experience of the person who intends to manage the capital in the market you are considering.
Ignorant money tends to make trades at the beginning of the day; Because the news and economic data that are shared in the media have a great impact on the decision-making of the holders of these funds.
When does smart money enter or exit the market?
In general, it can be said that smart money enters or exits the market when no one expects such behavior. In the following, we refer to the entry and exit times.
The entry of smart money into the market
It is a time when the amount of hope among market participants is at a minimum and everyone is selling their property and there is no significant buyer for it. At these times, smart money slowly and without attracting attention begins to accumulate the considered assets.
Price floors They are the most suitable point for entering smart money. It is very difficult to identify these floors and it determines the difference between this money and uninformed money.
Exit of smart money from the market
It is a time when the markets are at the peak of hope and the forecast of many activists shows the growth of the property and the registration of new peaks. By identifying suitable exit points, smart money withdraws its capital from one asset and enters it into another asset that has a suitable position.
tip: Price ceilings The most suitable points for withdrawing smart money are asset liquidation and profit recognition.
Smart money and its identification methods
If you are among those people who are looking to reduce financial risk and achieve the maximum possible profit in a market, the best way is to identify the entry and exit of smart money to the market. In the following, we will examine together how to recognize the entry and exit of these types of investors to different markets. Some of the mentioned methods can be used in all markets, and others only work in a specific market.
Smart money in the cryptocurrency market
There are different ways to check the entry of smart money into the cryptocurrency market, some of the most important ones are mentioned below.
1. Investigating the volume of transactions relative to the market value
The first method that we are going to mention in this article is to check the ratio of the value of trading volume in the last 24 hours of a cryptocurrency to its market value. For this, you can calculate this amount manually or to the site coinmarketcap Visit and access this parameter by personalizing the settings. To make these settings, go to the Customize section and activate the Volume/Mcap option from the Volume section. A column is added to the display table that automatically calculates the said value for you. It is enough to visit this site daily and register the said number. A noticeable change of this number depending on the area where the price chart is located can be a warning of entry and exit of smart money.
2. Smart money detection by MFi indicator
Indicator Money Flow Index or the cash flow index is one of the most useful indicators that can be used to analyze the entry and exit of smart money. To use this indicator, just refer to the indicators section and add this item to the chart. To use this indicator and recognize the entry and exit of smart money, it is necessary to examine the price divergence and the MFI indicator. If the price was forming a lower bottom, but no lower bottoms were registered in the indicator, it can be assumed that smart money is investing in this asset.
- The signals received from this indicator are accepted when issued at a valid support level, otherwise the possibility of ineffectiveness of the issued signal will be very high.
- Cash flow index can be used in other financial markets as well.
Using smart money in Tehran Stock Exchange
Various methods can be used to check the entry and exit of smart money in Tehran Stock Exchange, some of the most important ones are mentioned below.
1. Detecting the entry and exit of smart money by reading the board
One of the common methods of checking the entry and exit of smart money is to check the volume and value of transactions. If the volume and value of transactions in a share has increased at least twice compared to the previous days and the target share is in a strong support zone, the probability of this money entering the share increases.
Keep in mind that the bigger the said ratio is, the bigger the price growth will be in the future.
Another thing that can be checked to see the entry and exit of smart money into stocks is to check the ratio of buyer to seller power. If in one trading day, the power of the buyers of a share is more than the sellers (for example, 120 sellers have sold 1 million shares and 60 buyers have bought the same amount of shares), the probability of money entering this share increases.
2. Smart money recognition by filter writing
If you are one of those who have acceptable knowledge in the field of filter writing, you can refer to the watch section of the TSETMC website and use the filter section to implement the desired filter and check the entry and exit of smart money into stocks.
If you are not familiar with writing filters, you can use ready-made filters written by other people.
Investigating the entry and exit of smart money in the real estate market
Another attractive market that many investors are interested in investing in is the real estate market. To check the entry of smart money into the real estate market, it is enough to check the volume of transactions made in this market. To access this information, you can use the statistics published by the central bank. If the volume of these transactions has increased significantly compared to the previous month, it indicates the entry of smart money and new investors into this market.
Investigating the entry and exit of smart money in forex
One of the common methods to check the entry and exit of money in the forex market is to use the SMI index Smart Money IndexIs. This index was first invented by a person named Don Hays and used in financial markets. Smart money indicator is used to confirm trend and check divergence.
1. Process approval by SMI
One of the uses of this tool is to confirm the current market trend. If the price chart is recording a peak higher than the previous peak, and this movement is exactly repeated in the SMI, it can be concluded that the current trend is stable and its continuation is more likely than the market ending or suffering.
2. Examining the divergence using the smart money index
If, when checking a chart, the price manages to record highs higher than the previous high, but the SMI does not record a higher high than the previous high, the probability of a trend change increases, provided that the price is near a strong resistance.
Note: It is possible to use the smart money index in all markets that have a high depth.
Smart money and its impact on financial markets
If you are one of those people who are planning to invest in the financial markets, you should familiarize yourself with the concept of smart money, otherwise you may lose your capital. In order to be able to use the smart money index correctly, you need to know what, why and how it is. By what we meant, we meant to express a precise and clear definition of this index, which we provided a comprehensive definition of at the beginning of the work. In order to better understand why this index is used, we have shared its advantages with you, and we have examined the solutions related to each market in order to use it in different markets, so that you can make the best decision when investing and get the profit you want. . Have you managed to understand the entry and exit situations of smart money in the market? How effective do you think it is in making a profit?
What is smart money writing? Familiarizing with the concept of Smart Money for the first time in the Wallex blog. appeared.
