In this article I will explain what the smart money index is and its importance on the financial markets.
Smart money index is an important indicator that indicates the sentiment of informed investors, if you remember the article when I was talking about strong hands. In simple terms are experts such as hedge funds, institutional investors or important people like Warren Buffet/ George Soros.
Smart money index was advertised in the 90’s by Don Hayes, this indicator says that experienced investors usually enter the market at the end of the day, when markets are less affected by emotion.
News we receive are many, in recent years with social networks (like Facebook/Twitter) have multiplied, I think there are too many and many traders make themselves conditioned by making decisions on an emotional basis.
The formula for calculating this indicator is:
Value smi’ yesterday – up/down at day start, up/down at the end of the day
Investors will have to make a comparison with the market trend, checking whether the smart money index is increasing while market is falling.
The chart indicates that strong hands are in the long position while small investors are short, vice versa if not.
Traders use this indicator to confirm market trends or observe if there are divergences on the chart.
I add the importance of this indicator, because in addition to identifying the direction is able to eliminate the emotional part in intraday operation.
As mentioned before the smart money index, I use it to find divergences, because it helps me to understand reversal’s market points, but do not think that you have found the magic indicator because it does not exist.
It is simply a tool to add to the toolbox, in some situations it has been useful, for example in 2018 anticipated the collapse of the stock market while other times it failed.
Smart money index is a trend indicator to have on your monitors, as mentioned before is influenced by large investors so at the moment of the signal you may already be late, then open your eyes to the volumes and try to follow direction.
In my opinion it is important because it gives an overview of the market and in case of divergence it can provide signs of trend’s reversal.