The Smart Money strategy is based on observing the actions of large players — the so-called 'smart money' (institutional investors, large funds, professional traders) — who can significantly influence the market. Unlike the traditional approach, where investors rely on technical or fundamental data, Smart Money seeks to identify and capitalize on the interests of large players, believing that they have access to important information and more accurate forecasts. In this article, we will discuss how a beginner can apply this strategy in crypto trading. Get your notebooks or notes ready and take notes.
1. Understanding the basic principles of Smart Money
The main idea of Smart Money is that large players always monitor how and when they enter and exit the market to minimize the negative impact of their large trades on prices. They operate stealthily, accumulating or distributing positions gradually. Their activity can be identified by observing changes in trading volumes, sharp price fluctuations, and analyzing capital flow data.
These principles are the foundation of the Smart Money approach:
Analysis of large trading volumes: A significant increase in volume against a backdrop of weak price change may indicate accumulation or distribution of positions by large players.
Support and resistance: Smart money often influences support and resistance zones, creating levels that they defend. When the price reaches these zones, active buying or selling can be expected.
Market manipulation: Institutional players may intentionally influence the market by creating false signals for other participants and forcing them to make incorrect decisions.
2. Using volumes and market analysis
For beginners, volumes can serve as a good indicator of the activity of large players. Large volumes against a relatively stable price may indicate hidden activity of smart money. Some platforms, such as CoinMarketCap and TradingView, provide access to volume charts for various cryptocurrencies.
Cluster volumes: Study volume clusters to determine where accumulation of positions begins. If volumes steadily increase, this may be a signal that large investors are gradually accumulating the asset.
Analysis of 'whale' trades: Some platforms allow you to observe large volume trades, which may indicate the involvement of institutional investors. Pay attention to these trades during periods of low volatility, as they often precede future changes.
3. Working with support and resistance levels
Large players often create zones where they defend their positions, which can be noticed by price retracements or stabilization. Beginners are advised to use these levels to determine entry and exit points:
Support: If a cryptocurrency holds above a certain price several times, this may indicate that large players are buying the asset at this level.
Resistance: Similarly, if the price repeatedly reaches a certain level and cannot break through it, this indicates that smart money is selling their assets at this level.
4. Market psychology and false signals
Large players use crowd psychology to manipulate prices and elicit emotional reactions from traders. It is important for beginners to understand how to avoid traps:
False breakouts: Smart money can create the illusion of a breakout at a support or resistance level to attract retail traders, then reverse the market in the opposite direction. Be cautious with breakouts and wait for confirmations before entering a trade.
‘Shaking out’ or ‘flush out’: This is a sharp price movement downward that quickly returns back. The goal of such actions is to get rid of weak players before the actual movement.
5. Analyzing blockchain data and using analytics
Cryptocurrencies provide a unique opportunity to monitor asset flows thanks to public blockchains. You can track large transfers of funds and movements of cryptocurrencies to or from exchanges, which can indicate manipulations or preparations for large trades.
On-chain analysis: On-chain metrics, such as the number of large transactions or outflows of cryptocurrencies from exchanges, can provide insight into how large players operate. Platforms like Glassnode provide access to such data, helping you track the actions of ‘whales’.
Transactions of large addresses: If you notice large transfers, it may be a signal that the asset is under the attention of smart money. Study how the balances of the largest addresses change to gain insights into upcoming movements.
6. Practical application of the Smart Money strategy: example
Suppose you are analyzing #ETH and notice that its price has been consistently holding within a certain range for several days with increasing volumes. Soon the price reaches a resistance level but does not break through it. At first, it may seem that the asset is in an accumulation phase, however, large players often use such moments to create a false breakout to ‘shake out’ weak hands.
To avoid falling into a trap, apply the following steps:
Wait for the price to test the level several times.
Ensure that the breakout is accompanied by a significant increase in volume, as false breakouts often occur without volume support.
Check how large addresses reacted: if there is a noticeable outflow of assets from exchanges, this may be a sign that large players are looking to buy and further increase.
7. Risks and warnings
Like any strategy, the Smart Money approach requires caution and knowledge. The market can be unpredictable, and manipulations by large players are difficult to predict. Beginners are advised to exercise caution and always use stop-losses.
Manipulations and false signals: Remember that large players can create situations designed to mislead traders.
Force majeure events: The cryptocurrency market is influenced by news, and sometimes even the actions of large players cannot prevent sharp price fluctuations.
The Smart Money strategy offers beginner traders the opportunity to learn from large players by analyzing their behavior in the market. By using volume, support and resistance levels, on-chain metrics, and market psychology, you can make more informed trading decisions.
