Big Money And Volume Analysis
Hello traders, welcome to the Stock Trading course, and the third module, How the Stock Market Works.
In this lesson, we are going to learn how to follow the big money in the market. And we are going to learn how to do this based on a volume analysis.
Now, let’s first define what big money is. Well, big money, or smart money, simply defines hedge funds or large traders. And the SEC defines a large trader as a person whose transactions equal or exceed 2 million shares or 20 million dollars during any calendar day, or 20 million shares or 200 million dollars during any calendar month.
So why it’s important to follow them and to know where they are placed, and why it’s important to know where these players are positioned in the market is because when they trade, the market moves and players follow. It’s as simple as that. When they step into the market, you can see it on your charts. And not only you are going to step in also, but other profitable traders are going to step in and the market is going to move. And you don’t want to be left behind or you don’t want to be trading the other side of big money. You can’t be a profitable stocks day trader if you are trading against players that trade millions of shares of a company at any given time.
To put this in simpler words, let’s say you want to buy 200 shares of Netflix. And then you don’t know how to spot big money and the position goes against you. You end up losing 50 cents per share on your trade. When just by taking a volume analysis on your chart, you could have known that big money was actually selling Netflix and not buying it, so, you don’t want to be against them at any time in the market.
So, how are we going to spot the smart money? Spotting smart money is simple. We use the volume in our charts. Even when we are day trading in very liquid market, there is an average volume of shares traded at any time. When you spot a surge in volume, being up or down volume, above the average, it means more shares than normal are being either bought or sold at that level. Here is where big money is stepping in.
So how are we going to get the advantage of big money? Well, knowing where the big money is stepping in. Well, that’s simple, we already said it. We are going to use these volume surges to trade against it. And of course, we are going to try to follow them if we already had an idea of a trade. And more on the volume trading, in the Day Trading module of this course. This particular lesson is only going to teach you how to spot where the big players are. If you want to know or if you want to learn how to trade with volume, just continue with this course and you will find that out in the Day Trading module.
So how are we going to take advantage of knowing where the big money is? It’s simple, once you spot these in your volume chart, you take action. This will help you decide whether your trade idea is correct because you don’t want to be buying against big down volume and vice versa.
Now, we’re going to go to a chart and I’m going to show you how this looks like. So here’s the one minute chart on Netflix and we are going to look at today’s price action. There you go. You can see right here that we have the volume bars. And we have, what looks to be, a moving average. But this is, in fact, the moving average of volume, which is the average volume.
Now let’s take the two minute chart so we can have bigger volume bars. This is the two minute chart, we are going to look at today’s price action on Netflix. Right, so there you go. We have bigger volume bars because the aggregation time is bigger. Now, this is the open of the New York Stock Exchange. As you can see, the open can get very volatile. In further modules, we are going to teach you how to trade the opening. But if you are not used to trading highly volatile environments, we suggest you wait at least 15 minutes or 20 minutes after the opening for volume to stabilize, and for you to be able to trade levels.
Now we aren’t talking just about volumes or where big money is. The average, or the moving average of shares traded here in Netflix at anytime. Let’s take for example this part of the chart. You can see that the average on a two minute bar was 72,000 shares. And you can see right here that we have a surge in green volume. This means that more shares than average are being bought at this level. And as you can see right here, when the volume goes up, price goes up again.
And to put this movement in perspective, just look at the previous movement, from this low at 113.44, to the close of this candle at 113.84. That’s a 40 cent move in 1,2,3,4,5,6,7,8 candles or 60 minutes. That’s a 40 cent move in 60 minutes this candle moved from 113.84 to 114.25, which is 41 cents in one single candle. So you see the difference when the big money steps in. So if you were trying to get long, or if you got long and you see a surge in green volume, you know for sure that your trade idea was correct.
But, for example, let’s say that you wanted to go short at this level, because you can see the rejection here. And you are trying to play this range. You go short right here at this level, but when you see a surge in green volume, this means the big money is stepping in to buy Netflix at this level. You should definitely get out of your short position because you don’t know how much this surge in volume is going to last.
The same thing happened here, for example. Well, right here there was no movement in price, but you can see that someone was selling a lot of shares at this time of the day.
Right here, you have another surge in volume, when you have three [inaudible 00:08:01] green candles that go above the average of shares traded per 2 minute candle.
So this is how you’re going to identify where the big money is and how it’s going to help you know if your trades are correct, and know how to get out before you really get hurt on a volume spike.