Smart Money

Tom Williams writing about Volume Spread Analysis  (VSA) groups traders into Smart Money and the Herd.   He advises that Smart Money have to sell into uptrends and buy in to down trends which is the opposite of the way traders normally think.  This contrarian concept has puzzled me for a long time.  Re-reading Larry William’s (no relation to Tom) book Long Term Secrets to Short Term Trading, offers a possible solution.  Larry Williams states that since 1965 his operating rule has been “sellers in any time period are represented by the price swing from the high of the day to the close, while buying is represented by the close minus the low”, p.36, John Wiley & Co, 1999.  I think Chaikin’s Money flow uses similar concepts.

So here is how my new Bull chart template looks. I adapted as discussed further below the Wave Volume indicator provided in other post re Weiss Wave.  Two indicators are required. This is not any sort of investment advice but education on writing the indicators. The charts show Buy and Sell becasuse the markers are set up to identify start and end of trend only. The indicators show the  average or total volume for Smart money (Green) buying whilst the Herd (Red) is selling in in downtrends; and vice versa SM (Dark Violet) selling whilst the herd is buying (Cyan) in uptrends.  You may not be into VSA and may call the similar concept Bulls v Bears. I similarly colored my currently used trend indicator to show the same colour coding.

The conceptual framework works reasonably well as good strong up trends tend to be heavily coloured Cyan or Red as the Herd gathers momentum in Uptrends or panics in down trends. When SM are heavily buying the downtrends the indicators tend to show the down trend slowing or bottoming or when SM is heavily  selling the uptrend tends to slow or stops reasonably soon thereafter.  Anyway, something to play with.

On the Weiss Wave posts, I posted a formula for preparing a Bullcharts wave Volume indicator.  The changes needed for analysing the wave volumes for “Smart Money” and the “Herd” is to change a few lines of the previously advised formula as below.

For converting previous code to a SM Selling and Herd Selling average and Total  Wave volume indicator.

Add Larry Willaim’s book reference above to the Citation area and add the following new line to the code:

Value1 := (((H-C)/(H-L))*Volume); {Selling Vol}

And delete these two lines

BuyVol2:=If(BuyVol,+1*v,0);

TotalBuyVol:=If( BuyVol ,+1*v+prev(BuyVol2),0);}

And replace by these two lines

BuyVol2:=If(BuyVol,+1*Value1,0);

TotalBuyVol:=If( BuyVol ,+1*Value1+prev(BuyVol2),0);

And replace these two lines

SellVol2:=If(SellVol,+1*v,0);

TotalSellVol:=If( SellVol ,+1*v+prev(SellVol2),0);

With these this two lines

SellVol2:=If(SellVol,+1*Value1,0);

TotalSellVol:=If( SellVol ,+1*Value1+prev(SellVol2),0);

The above will give you the breakdown of the selling wave Volume into a Smart Money Component and a Herd Component.

For the Buying wave just copy the amended formula, change the name to buying  and

Just replace the Value formula to the formula shown below

Value1 := (((C--L)/(H-L))*Volume); {Buying Vol}

That’s it for the second Wave histogram.

To check if you have done this correctly the average on both these amended formulae will reconcile to the previous Wave Volume formula.

The ribbons shown on the charts are just subsets of the above amended indicators with Linestyle =Ribbon.  Text for the amount of volume can be added if you want to show in text, as well as bars.

I will add some charts below so you can make up your own mind if this is of any use.