What is ‘smart money’ and how does it influence the market? In this guide, we are going over some tips on how you can use to benefit from institutional trading data.
What is ‘smart money’?
Given the magnitude of their capital, institutional investors make a noticeable impact on market charts whenever they trade. Tracking ‘smart money’ involves identifying where and when these heavyweights are trading in order to capitalize on the ripple effects their trades make in the market.
Warren Buffett is probably the prime example of ‘smart money,’ with some six decades of trading experience with Berkshire Hathaway (NYSE: BRK.A), whose returns have historically doubled the S&P 500’s average.
Investors analyzing institutional market movements typically look at:
- Timing: In addition to market fluctuations, ‘smart money’ transactions result in high-demand or high-sell periods, often highlighting strategic moments for buying or selling;
- Order flow: Unlike typical market price moves, ‘smart money’ patterns involve institutional trades like selling in an uptrend or buying in a downtrend. These maneuvers often anticipate potential trend reversals, which retail investors can observe and respond to accordingly;
- Institutional market influence: ‘Smart money’ analysis isolates institutional impacts from general market activity. This helps investors distinguish between false signals and genuine indicators of institutional involvement.
Should you rely on ‘smart money’?
Tracking a billionaire’s investments and copying their strategy seems like a sound strategy. They are a billionaire, after all. They know what they are doing, don’t they? Yes — and no. The question is nuanced, and a more critical approach is necessary (see below on ‘smart money’ concepts).
Many retail traders believe they can simply mirror institutional trades, but the reality is far different. Indeed, even top investors often find it hard to consistently outperform the market. In fact, most hedge funds underperform the S&P 500 index annually.
A 2012 study also found that investors of institutional funds do not necessarily choose better funds:
“Surprisingly, our results suggest that investors of institutional funds, with a higher representation of more sophisticated investors, do not demonstrate a better fund selection ability. Probably, performance persistence, widely documented by existing mutual fund literature, represents one of the main observable attributes of superior ability of the fund manager, while past return information is accessible and widely used by investors of both types of funds. If so, a higher level of financial sophistication does not necessarily lead to better fund selection ability. Alternatively, performance persistence, providing some extent of return predictability, together with accessibility of past return records and financial advisers’ services, allow unsophisticated investors to demonstrate fund selection ability as well.” — Salganik-Shoshan (2012)
Another major problem lies in capital size and market influence. As mentioned, institutional investors have access to vast funds, enabling them to execute bulk trades that significantly impact stock prices — a level of influence most retail investors cannot exert.
Note that institutional traders do not impact all markets equally. For example, non-fungible tokens (NFTs) seem more immune to price changes. A 2024 study indicates that “this finding challenges the prevailing belief that these investors significantly impact floor prices and trading volumes.”
Institutional investors also have unique access to exclusive investment opportunities, like angel and pre-IPO investments, that are unavailable to the public. Additionally, they operate under different regulations, with agencies like the US Securities and Exchange Commission (SEC) imposing fewer restrictions on them than on retail investors.
Smart Money Concepts: How can you benefit from ‘smart money’?
We mentioned a more nuanced approach is necessary when relying on ‘smart money’ to lead you through your investment decision-making. That is where Smart Money Concepts (SMC) come in.
Smart Money Concepts are a trading approach that merges technical and fundamental analysis to uncover profitable opportunities. This strategy helps traders identify ideal entry and exit points for a variety of assets, including stocks, exchange-traded funds (ETFs), and so forth.
A major advantage of SMC trading is being able to make well-rounded decisions based on a variety of data. That is, by leveraging both technical and fundamental analysis, investors can achieve a comprehensive understanding of the market and potentially identify valuable opportunities and mitigate risk.
Likewise, SMC trading is useful for spotting market trends. Technical indicators can reveal potential patterns and shifts, helping you align your decisions with them and potentially maximize your returns.
The biggest upside, however, is probably risk management. Technical analysis helps investors identify potential risks and adjust their positions proactively, which reduces the chance of substantial losses that can occur when you rely solely on institutional data.
How to track ‘smart money’?
Tracking institutional investments can be challenging for a variety of reasons. The biggest one has to do with timing — by the time institutional investment data is public, the market is likely already different, that is, affected by the very institutional trades retail investors are trying to track.
Each quarter, retail investors can see top investors’ stock trades via 13-F filings, which US-based institutional investment managers with over $100 million in assets are obliged to file. While these filings are not real-time updates, a number of holdings are likely to remain stable over time, making some mirroring strategies feasible. You can access this data through the SEC’s EDGAR database.
Alternatively, you can use notification systems such as Finbold Signals to receive live updates on institutional trading activity via email, Telegram, and Discord.
‘Smart money’ tracking tips
Here are some tips and tricks you can use to track ‘smart money’ more efficiently:
#1: Read the news
Staying up-to-date with market news is the first and most important step when tracking ‘smart money.’ With a bit of patience and practice, you will start noticing trends and patterns, for example, that negative news often results in stock price drops.
Sometimes, a price dip may be orchestrated in order to allow ‘smart money’ to buy at lower prices ahead of a rally. Conversely, radical price spikes, coming as a result of positive news, might indicate that ‘smart money’ is cashing before an upcoming downturn.
For more info on what kind of stocks institutional investors are most drawn to, feel free to check out our dedicated guide. Also, be sure to check out our guide on what institutional ownership can tell us about a stock.
#2: Track volatility
Market volatility is another key indicator of ‘smart money’ activity. Naturally, this is because large institutional moves are what tends to create significant price shifts in the first place. Tools like average true range (ATR) indicators can reveal volatility spikes and potential smart money actions.
#3: Follow the commitment of traders reports
Commitment of traders (COT) reports reveal the positions of prominent market players. This can give you some insight into where ‘smart money’ is likely positioned. As a result, you will be able to assess long-term trends and understand market sentiment a bit better.
#4: Track volume indicators
Volume indicators can also give you some some insight into ‘smart money’ moves, especially when data like COT reports are not available when you need them.
The bottom line
To wrap up: understanding and tracking ‘smart money’ can give you some unique opportunities to observe the strategies and market moves of seasoned professionals, even though their market influence far exceeds that of retail investors. However, following ‘smart money’ should be balanced with careful research and personal investment goals to build a sound, tailored approach to the market.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs about smart money
What is smart money?
Smart money refers to the investments made by institutional investors, like hedge funds and mutual funds. Their large capital allows them to have a significant influence on the market, in contrast to retail investors (the so-called dumb money).
What is ‘dumb money’?
In contrast to ‘smart money’, the term ‘dumb money’ refers to retail investors, especially those new to the market.
What are Smart Money Concepts?
Smart Money Concepts are an investment strategy that relies on technical and fundamental analysis to uncover profitable opportunities instead of relying on institutional data, i.e., ‘smart money,’ alone.
Can you track ‘smart money’ in real time?
Institutional trades are typically not visible in real time. By the time institutional trades are reported, the market may have already reacted. For example, quarterly 13-F filings are released up to 45 days after the quarter ends.
How to detect ‘smart money’?
Common signs of smart money include large, strategic transactions, insider buying, and institutional investment in high-growth sectors.
How do you track ‘smart money’?
For the most streamlined experience, you can rely on Finbold Signals to receive live updates on institutional trading activity via email, Telegram, and Discord.
What are some examples of ‘smart money’ investors?
Notable examples include Warren Buffett and the investment managers at large institutions like Vanguard.
Should you track ‘smart money’?
While ‘smart money’ can offer valuable insights, retail investors should not blindly replicate institutional trading strategies but rely on a more balanced and well-researched approach.
