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Understanding how Smart Money Operates.
Understanding how Smart Money Operates.

There are four cycles to the market all of which are controlled by Smart Money.

FlowAlgo avatar
Written by FlowAlgo
Updated over a week ago

The 4 Cycles of the Market. 

The Accumulation Phase

  1. Develops towards the end of a downtrend. After price has been coming down for some time, the losses for most small investors and retail traders become too large so they begin cutting their losses. As they begin to sell their shares, Smart money is right there, sitting on the other side buying them up at a major discount.

  2. Smart money is well informed. Far more informed than the general public. Not only on the overall market but also on specific companies. They know when to step in and buy as well as when to step out and sell.

  3. If Smart Money is aware of an upcoming catalyst, they begin to buy up shares. 

  4. During the Accumulation Phase, a stocks price will remain within a tight range.

  5. There isn’t much money to be made during this period. 

  6. The purpose of this phase is for Smart Money to buy up as many shares as they can at the lowest possible price. 

  7. Smart money is able to keep a stocks price within a tight range by spreading negative news or by selling just enough shares to drive the price lower and scare you out of your position. They are right there waiting to buy.

  8. The price will remain within this tight range until they’re done accumulating. Small investors and retails traders at some point may sell just due to the price not moving during this period or Smart Money may get more aggressive and quickly flush the price down just below support levels to clear out as many stops as possible.

  9. Smart Money not only wants to buy up as many shares as they can get their hands on but they also want to clear out all of the sellers so that when they allow the algorithms to take over, they can push the price up quickly with very little friction. 

  10. When the run up begins, they pocket large amounts of money in a very short period of time which bring us to the next phase.

The Ascending Phase

  1. After Smart Money's done loading up, they allow the algorithms to take over pushing the price as high and as quickly as possible. 

  2. As price breaks out above resistance/out of it’s consolidation range, everyone takes notice drawing massive volume and aggressive upward momentum. 

  3. The ascending phase establishes a trend that is referred to as a rising channel and along the way forming bullish continuation patterns. 

  4. This is the period in which Smart Money is making it’s money. 

  5. This is the time to go long and let profits run.

  6. There is more buying pressure than selling pressure and the bulls are in full control.

The Distribution Phase

  1. When Smart Money hit’s their target, they’re now looking to sell.

  2. The period in which Smart Money begins to unload their shares is called the Distribution Phase and develops toward the end of an uptrend that has been running for some time.

  3. This is the time when most uninformed investors and retail traders are just getting in. As they are buying in, Smart Money is there happily selling their shares to them and locking in profits.

  4. Smart Money quietly unloads their shares without disrupting the price. They don’t want anyone catching on to what they’re doing otherwise the price would dip, cutting into their profits. They sell their shares slowly over a period of time within a tight range of sideways price action.  

  5. They may spread news making the public believe that prices are going to move higher or they may buy just enough shares to push prices higher drawing in more buyers. In the end, trapping uninformed investors and retail traders at the highs.

  6. Smart Money continues unloading. Drawing in all the buyers until there are very little left.

  7. By doing so, Smart Money is ridding any buy pressure so that the upcoming sell-off is frictionless and rapid.

  8. The distribution phase is the time to be locking in profits or looking for opportunities to go short.

The Descending Phase

  1. After Smart Money has distributed/unloaded it’s shares, they allow the price to drop through support and high frequency trading algorithms push prices lower. Because there is very little buyers left, the only direction is down and downward momentum picks up quickly.

  2. The descending phase establishes a trend that is referred to as a descending channel. Along the way consolidating and forming bearish continuation patterns. 

  3. This is the time to cut losses or go short.

  4. There is more selling pressure than buying pressure and the bears are in full control.

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