How to Track Smart Money Flow in the Markets

The smart money knows when the broad market is ready to turn and what a certain stock is going to do before anyone else has a clue – or so it seems. In truth, smart money investors have massive research and analytical resources you don't have.

They are the professional investment fund managers who are responsible for billions of dollars of client money, so they should have the best information. They also move around so much money, they tend to influence the market. If you know what to look for, you can figure out what they are doing and go along for the ride.

Find an online interactive charting service that displays on-balance volume. It is a commonly used indicator. Most major online brokerage firms provide interactive stock price charts that include OBV as a technical indicator overlay.

Put in the symbol for your stock and choose the OHLC chart format, which stands for open, high, low and close. It is a bar chart that makes it easy to see the price range for a stock in a given time period ranging from every five minutes to every day, week or month depending on the number of years you are charting.

Choose the on-balance volume chart overlay indicator. It is generally shown as OBV. It will appear as a line chart and, if it is positioned over the bar chart of prices, will easily reveal whether the OBV is leading the market or lagging.

Note whether OBV makes new highs when prices are in an uptrend, or makes new lows when prices are in a downtrend. This is how it should look in normal trading. However, if it looks different, you may be seeing evidence of smart money movement.

In a downtrend, a stable OBV or new highs means smart money may be accumulating stock in anticipation of a run-up. If OBV makes new lows or lags an advancing market, it is likely that smart money is taking profits and moving out of its portfolio positions.

On-balance volume can be used with single stocks to find a good investment before it makes its move or get out before it drops. OBV can also be used with the indexes such as the Dow Jones industrial average or the S&P 500, to estimate the possible direction of the broad market.

Always confirm indications given by OBV by checking other indicators. The relative strength index shows overbought or oversold conditions. The moving average convergence/divergence is used to spot a change in momentum, trend and direction of a stock. Trend lines, moving averages and other technical indicators are also useful.

Technical indicators are not always easy to interpret correctly, and by the time you recognize a potential accumulation or sell-off by the smart money, the action may already have passed. In addition, professionals often take advantage of their abilities to move huge volume in and out of the market rapidly via computer trading, giving an impression the market is about to move. Be prepared for what traders call a "whipsaw" – indication of accumulation in a stock followed by a rapid sell-off as the professionals take their profits when the not-so-smart money is drawn into the market to buy.