Can Retail Traders use Macro and Fundamental Analysis to Trade?

Many retail traders are super smart and capable when it comes to analyzing macro events that could effect markets as well as company specific data that could potentially move that company’s stock. They can formulate a hypothesis that seems just as sound as that of any top Wall Street analyst. That makes sense, given that all material information is supposed to be public and, therefore, everyone has an equal opportunity to see and utilize all of that information.

If you want to make a long term investment in a stable and liquid stock based on your analysis, you are willing to hold through drawdowns and you set a stop at the level you can admit that you were wrong, then you’ll probably be ok. But if you’re looking to place shorter term trades based on your macro or fundamental analysis, then I think you’re taking a risk similar to a gamble.

The smart money, like institutions, hedge funds, mutual funds and other massive financial entities, move markets. They are the only ones that trade the volume needed to do so. Retail traders are almost always just a tiny blimp on the screen, an annoying pimple to be popped by smart money traders seeking liquidity.

The smart money has teams of the best brain power that money can buy who spend their days and nights analyzing companies and markets. They also have access to information that is way beyond the reach of smaller players and retail investors. They speak directly to top corporate leaders and government officials and get insights and information that might never be published in the media the rest of us read. When news is published, the smart money usually already has that information from the original source, and has acted on it. In some cases the smart money is the one responsible for leaking (or even creating) the story.

For example, when the latest Israel-Hamas war broke out, crude oil spiked as would be expected. Then the questions was, would crude continue to rise, based on the possibility that the conflict would spread to the entire Middle East, particularly to Iran, which is the primary backer of Hamas and Hezbollah. I personally felt, and still feel, based on my knowledge of Israel, that the conflict will spread. So I expressed my analysis by buying shares of USO, the largest and most liquid ETF that tracks crude futures. The smart money did not agree with my analysis. Instead, they focused on weaker China economic numbers and a warmer than normal winter, which translates into lower energy demand and lower oil prices.

The smart money clearly had greater insight into the macro geopolitical military situation than I did. They will ALWAYS have better information, data and insight than us retails traders. So trying to trade based on our own macro and fundamental analysis is basically like trading with no edge at all.

The Only Way to Trade Fundamentals

The only way for retail traders to trade on fundamentals is to rely on the smart money to do their research and make their move first. We can’t compete with the smart money, but there’s nothing stopping us from following them.

The clearest way to follow the smart money is by watching the volume behind the price action in a stock or index. Moves made on large volume indicate that the smart money is behind the move, long or short. Moves made on light volume indicate retail activity or a move by the smart money to fake out retail traders and draw them into taking the opposite side of a position that the smart money wants to take.

Another way retail traders can try to determine what the smart money is doing is to follow the options flow in a particular stock or index. Large direction options flow indicates smart money positioning. While it’s impossible to know the true strategy behind options flow, there are ways to greatly increase your odds of correctly identifying the intention behind the flow.

Looking at a combination of volume and options flow can give retail traders a good shot at guessing what the smart money is doing, and giving them the opportunity to follow them into the trade.

Bottom Line

Macro and fundamental research and analysis is an important component to determining what stocks to trade, but it’s not something that retail traders and investors can do effectively, since the information and data available will always either lag or be deficient compared to the research and data available to the smart money.

The best way to do macro and fundamental research and analysis is to rely on the smart money to do it for you, and then simply follow their trades, by tracking volume and options flow.

How Implied Volatility Can Effect the Success of Your Options Trades

Trading stocks is fairly straightforward. If you buy the stock and the price rises, you make the difference between the current price and your cost. If the price drops, you lose the difference between your cost and the current price. It doesn’t matter how long you hold the stock or what else happens in the market, even if it’s related to the stock. All that matters to your profit or loss is the price you bought and sold the stock at.

Trading options is much more complex, because there are numerous factors that play a role in effecting the options pricing. The factor that we’ll discuss in this post is implied volatility.

Implied volatility reflects the market’s perception of uncertainty about the future movement of the underlying asset. Higher implied volatility indicates greater uncertainty, which makes option prices more expensive. That’s because the people writing, or selling, the options are taking on more risk, so they raise the options premiums to cover that added risk.

Higher implied volatility generally leads to higher option premiums, and lower implied volatility leads to lower premiums.

Higher implied volatility also increases the potential for larger price swings in the underlying asset, which can result in greater profits or losses for option holders. That potential for large price swings causes the premiums to be more expensive.

It’s not clear who exactly determines the implied volatility on a financial instrument. Most likely it’s the market makers of that instrument. But it doesn’t really matter who determines it — all that matters to traders is that it exists.

Let’s look at a fictional example:

Suppose there is a stock trading at $100 per share, and you are interested in buying a call option with a strike price of $105 that expires in one month. At the current implied volatility, the option is priced at $3.

Now, imagine there is a significant news event expected to be announced in a few days that could potentially impact the stock, like an earnings release or investor presentation. This creates uncertainty in the market, leading to an increase in implied volatility.

As a result of the increased implied volatility, the option price may rise even if the stock price remains at $100. The higher implied volatility reflects the market’s anticipation of increased price swings in the stock in response to the upcoming news. Due to the higher implied volatility, the option price might increase to $5, even though the stock price remains unchanged.

Conversely, if the implied volatility decreases, the option price could decrease even if the stock price remains the same. For example, once the earnings are released, the implied volatility that rose ahead of the release will usually drop significantly (IV crush).  In this case, the option price might drop to $2, causing you to lose money while the stock price holds steady.

This inevitable implied volatility contraction following an anticipated, potentially market moving, event is a major reason for not holding options through the respective event. Even if the event goes according to what you anticipated, you can still lose money if the underlying stock doesn’t move enough to compensate for effect of the implied volatility drop on the price.

Long Term Positions

Changes in implied volatility will have the most pronounced effect on shorter dated options. The further the expiration dates are on your options, the less implied volatility will effect the option price, assuming that the underlying instrument price moves materially in your direction.

For example, if a company has an earnings release in a few days and you buy a call with an expiration date 3 months in the future, the implied volatility drop from the ER should be minimal — but it’s hard to calculate with any certainty since the determination of implied volatility is pretty much a black box — for market maker eye’s only.

Intraday Changes in Implied Volatility

Material changes in implied volatility don’t only result from major events such as earnings releases. They could happen during a regular trading session as a result of a news release or rumor that causes a surge of trading activity. If you get into an options position at the start of one of these surges, you can often get out at a nice profit based on the IV boost alone. On the flip side, if you buy in at the apex of the IV surge, you can lose quickly when the excitement calms and the IV drops, even if the underlying price remains relatively unchanged.

Bottom Line

When trading options, just getting the direction of the underlying move is not enough to assure a profit. You also need to take into account the effect that a change in implied volatile will have on price of your option.

How to Use Options Flow to Trade Along with the Smart Money

The financial markets might be highly regulated and provide everyone with an equal opportunity to trade, but as a retail trader, you are almost always at a disadvantage compared to the market makers, institutions, funds and large traders — otherwise known as the “Smart Money”.

The Smart Money Advantage

  • The Smart Money has access to information that you don’t, and they see public information before you do. That means they place their trades and move a stock on news before you have a chance to act. When you do finally try to trade the news, they are usually taking their profits, at your expense.
  • The Smart Money (specifically market makers) can see the order book, which displays the current buy and sell orders and their quantities, so they know exactly where the stops are located — and can push price to those levels to trigger those orders.
  • The Smart Money has the financial power to move a stock price, especially if the trading volume is light, and draw retail traders into buying or selling a stock, only to then rip the stock in the opposite direction.
  • The Smart Money can use the media to print or broadcast analysis, rumors or even fake stories to draw traders into a position and create the liquidity they need to profit from their own position.
  • The Smart Money can, in rare situations, actually change the rules and regulations to save themselves from losing. Some recent examples of this have been preventing retail traders from either buying or selling specific stocks — remember Gamestop and AMC?

Trying to beat or outsmart the Smart Money is futile. The only way for a retail trader to be truly successful in trading is to be able to identify and align yourself with the Smart Money.

There are several ways to follow the Smart Money, including technical analysis and volume analysis — both of which help identify major stock moves that can only be made with Smart Money participation.

Another powerful tool that can help level the playing field and provide a way for retail traders to follow the Smart Money is options order flow analysis. By understanding and utilizing options order flow, retail traders can gain valuable insights into Smart Money sentiment and potential.

In this blog post, we will explore how to effectively use options order flow to trade along with the Smart Money.

Using Options Flow to Trade with the Smart Money

Options order flow refers to the analysis of the incoming buy and sell orders for options contracts. It involves monitoring the volume, direction, and timing of these orders to gain insights into market participants’ intentions and sentiment. By examining options order flow, traders can uncover valuable information such as institutional buying or selling, unusual activity, and the overall sentiment of market participants.

In order to follow and analyze the options flow in real time, you’ll need access to a service that provides the data you need. The one I use is BlackBoxStocks.

Identifying and Interpreting Smart Money Activity

1. Transaction Size

Below are large options trade in PXD (Pioneer Natural Resources) that took place on 5/22/23 and 5/23/23. On 5/22 over $730k of calls (almost 1000 contracts) with a strike price of 215, expiring on 7/21, were purchased in 2 large trades (the bottom 2 lines of data). On 5/23 it looks like 217 of those contracts (the white line) were sold and rolled into the 225 strike for the same expiration date. This type of large call buying can only indicate Smart Money activity. No retail trader is laying out that type of money on options!


There’s a lot more to analyze about this particular options flow data set but, for the purposes of this post, we have enough data to know that some Smart Money player is betting that PXD is moving higher by July 21. You, as a retail trader, can buy a few calls and ride along on the coattails of this Smart Money player.

It’s worth noting that Smart Money players will sometimes split up a large order into multiple smaller sized orders. That means you might see a bunch of smaller dollar amount orders in the same strike and expiration that actually represent a single player — so you’ll need to break out your adding machine to see how big the actual play really is.

BEWARE — there is absolutely no guarantee that Smart Money bet will be right — OPEC or other world events can easily change the trajectory of oil and the energy stocks. And there’s also no way of knowing what other positions this particular Smart Money player has, and whether is particular play is not just a hedge or a piece of some other larger strategy — which would invalidate the benefit of following it.

But trading is a game of probabilities, and this data gives us enough ammunition to place our bet in the same calls as the Smart Money player is buying.

2. Unusual Options Activity

Sometimes you’ll see some relatively large options transactions — calls or puts — in a ticker that rarely see any options flow. That’s what you would call unusual options activity. It’s often a signal that someone knows something about the ticker that you don’t.

You might ask, how can they trade on non public information? Isn’t that illegal?

Well, what can I say. Legal or not, the fact is that in many cases a piece of “unexpected” news comes out soon after those options are acquired, in the direction of the trade. I’ve seen many cases on unusual call buying a day before an analyst upgrade or a buyout is announced.

Did someone trade on proprietary information? That’s up to the SEC to figure out.

The only thing that matters to us retail traders is to follow the lead of the Smart Money.

3. Intensity of Options Activity

Another thing to watch in options flow is the urgency or frequency of the trades.

A single options trade, even with substantial size, is something to notice but might not be something to act on. But when multiple trades come in, within a short period of time, at the same strike and expiration, it indicates a sense of urgency. These Smart Money players really want to get into this position, and they want to do it asap. Maybe you should consider tagging along for the ride?

Using Options Flow for Stock Trading

You don’t have to trade options to benefit from using options flow. You can buy or sell stocks based on your interpretation of the flow. For example, in our example of the PXD options flow, instead of buying the 215 calls expiring in July, you could buy the stock and not have to deal with time decay or implied volatility fluctuations.

The options flow can also help you time your trades, based on the expiration dates of the options being traded by the Smart Money. Weekly options indicate short term trades while expiration dates with lots of time indicate longer term trades.

Bottom Line

No matter how fair the market seems to be, the Smart Money is going to come out ahead most of the time. If you want to trade successfully, you need to be trading with the Smart Money, not against them. And one of the way to follow the Smart Money is to analyze options flow. With the right tools and training, you can do just that — and trade in sync with the Smart Money.

What is a Low Volume Retest and Why is it so Important?

The two most important market indicators traders watch and base their trading decisions on are price and volume.

When a stock price rises on heavy volume, it generally suggests strong buying interest. When a stock price falls on high trading volume, it indicates strong selling pressure. Heavy volume in liquid stocks almost always indicate smart money (institutional, market makers etc) buying or selling. Even though retail traders can occasionally make a stock move, as was the case with many of the meme stocks, like Gamestop and AMC, these instances are rare and, even in the meme cases, major hedge funds were heavily involved in the trading. In other words, heavy volume is a tipoff that the smart money is making a move.

When a stock price rises on low trading volume, it suggests weak buying interest and when a stock price falls on low trading volume, it indicates weak selling pressure. This weak buying or selling is usually thought to represent retail buyers.

Price moves on low volume are usually not sustainable and tend to reverse in the direction of the original, high volume, move. The reason this happens is based on a combination of market psychology and market manipulation, usually to the detriment of retail traders. 

How the Low Volume Retest Works

For example, let’s say stock ABC hits a major resistance level at 100 and then starts to sell off on heavy volume and reaches a support level at 80. The selloff could have been triggered by a change in fundamentals, a news headline or a general market move. The reason for the move doesn’t really matter. The only thing that matters to traders is that the smart money has decided to sell the stock and reap their profits, and has also probably decided to short the stock.  But in order to sell stock in the kind of volume that the smart money does, they need to have buyers.

Once the stock price has hit 80 and sellers have been exhausted, the smart money can either start covering some of their short positions and take their quick 20 percent profit (100 to 80) or they can push the price higher and then short it again. So they do a little short covering and start buying a little to create the impression that the stock is starting to reverse and rebound. Coincidentally, a positive news headline might come out or perhaps a rumor about a merger or takeover.

Suddenly, the stock price starts moving higher and retail traders following the stock, thinking that the worst is over start buying in the high 80s. Before you know it the stock is back to 90. However, the move up has been on low volume — a combination of smart money tease buying and retail FOMO. Don’t forget, the smart money has no problem buying tens of thousands of shares to get retail buyers excited about the stock move.

At 90 the smart money decides that it’s time to continue their original plan. As retail buyers continue to pile into the stock as it pushes higher, the smart money gets busy selling the shares they bought back at 80, making another nice profit, and adding to their short positions. As the stock starts to push lower, retail traders either get stopped out or scared out of their long positions, causing the selling pressure, and volume, to increase. Now the stock drops breaks through the 80 support on heavy volume and continues lower.

Here’s the final recap: Smart money sold at 100, bought back at 80 and sold again at 90, making nice profits. Retail traders bought in the high 80’s through 90 and sold at a loss. The only way to avoid this retail trap is to watch the volume behind a move.

Let’s look at a real life example.

Below is a daily chart of CAT. The actual dates or price points are irrelevant to our topic. All you need to focus on the price action and the corresponding volume. The white line going across the chart is the 89 day moving average.

Going from left to right, the first set of arrows indicates a break below the 89 on heavy volume and then continuation. Notice the very tall orange volume bars, which let you know that the smart money is in the game. The next group of arrows shows the buying and higher price movement on low volume (retail), which is followed by another selloff on heavy volume (smart money). The second group of arrows shows another price rise on low, and diminishing, volume.

The chart ends with the stock just below the 89 looking like the selling pressure want to strike again. What will happen on the next bar is anyones guess, but going long right here below the 89 with the air coming out of this latest rally is probably not the best move to make.

How to Take Advantage of the Low Volume Retest

Before you kick your laptop and curse the smart money monsters out to get your money, just realize that there’s a silver lining at the bottom of this market mess. If you can learn to identify these weak, low volume price moves, you can get on the same side of the trade as the smart money and cash in just like they do.

When you see a stock pushing higher on low volume after a big move, instead of succumbing to FOMO and jumping in to buy with the rest of the retail community, just wait. And when it looks like the air is coming out of the pumped up rally, which you can tell by the volume drying up, then go short. The challenge is not to get short too early, because the move higher can keep going longer than you thought, even on low volume. [Same holds true if the stock is pushing lower on heavy volume.]

Bottom Line

The underlying strategy to your trading should be to try and trade with the smart money and not against them. The biggest clue to identify what the smart money is doing is to look at the volume behind the price action.  Price moves on big volume usually indicate smart money buying or selling. Price moves on low volume usually indicate retail buying or selling, often stimulated by smart money trading traps.

Another way of following the smart money is to follow institutional sized options trades. You can identify those options trades using various screening tools. The one I use is Blackboxstocks.

Best of luck in following the smart money!

Trading Rules I Learned from a Losing Trade

Learning trading rules and lessons from bad trades is never fun. But sometimes learning the hard way, along with some pain, makes those important rules stick better.

Writing about this particular trade is pretty painful for me and something I’d rather not do. It was a difficult decision to make but I’ve decided that it’s worth feeling embarrassed in order to teach some important lessons that will hopefully prevent others from making the same mistakes I did. Most of all, writing this will hopefully burn these lessons into my own mind, so that I never make them again.

Here’s what the trade was and the trading rules I’ve carved into my consciousness.

The Trade

The ticker was TEAM, which is an Australian software company called Atlassian Corporation. The actual company doesn’t really matter, since the trade was completely based on technicals, although the sector the company is in — high growth software — does play a part in this story.

The market moved higher on Wed. morning Jan. 18, 2023. The high growth software names, including TEAM, were popping, giving off the (false) impression that the green light had turned on for this sector and it was time to get on board.

At around 10am, over $2 million worth of call option sweepers printed on the BlackBoxStocks platform that I use. They were deep in the money with an expiration date of 6/23. It seemed like some smart money players were placing their bets on TEAM moving higher.


The stock was pushing higher with volume as these calls came in, which could have been a result of the market maker buying stock to hedge the $2 million of calls it just sold.

Watching the stock surge higher, I decided to jump in for a short term day trade. With the sector moving higher and the huge call buying, I assumed that the odds of the stock continuing higher were squarely in my favor.

Below is a 1 minute chart of TEAM. You can see the surge higher on relatively heavy volume. I placed a market order and got filled at the high — 157.63. Ouch.

Fast forward to the end of the trade, I got stopped out at around 20 cents above the day’s low (see the white arrow).

Now that I’ve ripped the bandaid off and showed off my raw wound, let’s go through the trade and tried to learn something from it.

TEAM Chart

Trade Plan

You must have a trade plan before you enter a trade.

  • Your trade plan should explain your reason for entering the trade. In this case it was a combination of call flow, price rising on heavy volume and overall sector strength. As far as a I know, there was no news item that served as the catalyst for the price surge.
  • Your plan should also clearly delineate in what circumstances you will exit the trade, either at a profit or loss. In this trade, my stop loss could have been set below one of the moving averages. A break below the 21 (yellow), 34 (blue) or 89 (white) would have been sensible places to cut my losses. A drop below the 200 ema, which is the gray line stretching horizontally across the chart, should have removed all doubt that my thesis for taking the trade was wrong.
  • Whether or not your trade plan should include a profit target is a point of debate. Some traders like setting a specific target. Others, including myself, prefer to see how the chart unfolds and take profits when the chart tells you to.
  • You must establish the timeframe for your trade. Your timeframe will dictate what charts you should be using. I’ll expand on this in the following section.


If you’re trading based on technical analysis, you need to make sure that the charts you’re using correspond to the timeframe in your trade plan. If you’re scalping or trading very short term, you’ll want to use the 1min, 5min and 15min, while still being aware of longer term trends and support resistance levels based on longer term charts. For longer term trading, you need to focus on the longer term charts and not get shaken out by short term price moves.

I got into the TEAM trade based on call flow going out to June, 2023, which means that I should have been focusing on a daily and weekly chart. Instead, used the 1 minute chart. Now that would be ok, if I changed my trading plan from the outset, from swing to a scalp, in which case I should have stopped on the cross below the 89 or 200 on the 1 min. Instead, I held on to my swing plan, but then got shaken out when I saw the price dropping, until I finally got taken out at the worst possible price.

Had I stayed will my original long term thesis that I had based on the longer term flow, I should have held the position. Whether that would have been the right move to make is an unknown, because no one knows what the future will bring. But the goal here is to follow a plan, and I failed to do that.

FOMO – Don’t Chase

The “fear of missing out” is one of the worst enemies of a trader. It makes you get into positions that have already made a significant move (in either direction), because you don’t want to miss out on getting in on the momentum. That’s not to say that just because something has run it can’t continue even more in the same direction.

But in most cases, stocks don’t just go up in a straight line. At some point, demand will cool down or dry up completely and sellers and profit takers will take control, causing the price to pull back. If you believe that the stock will continue to go higher, then you’ll want to wait for that pullback to buy.

Volume is a good way to judge the strength and sustainability of a move. In my TEAM trade, you can see that the volume at the top dropped off, although it still was relatively greater than average. The drop in volume and the fact that the stock had already run over 4 points should have made me pause and wait to see if a pullback was coming. Instead, FOMO got the best of me and I entered into the chase, only to be left holding onto the the hot potato when everyone else was dropping theirs.

Uncertainty – Risk Management

The truth is that you can never know what the market will do in the next second. All you can do is take educated guesses based on probabilities, which you determine using whatever type of analysis or information you’ve chosen to use.

Even with the probabilities stacked in your favor, the market can still go in the opposite direction. The way to mitigate that unfortunate occurrence is by employing risk management.

Risk management in trading can include position sizing, hedging, stop losses and profit targets. In my TEAM trade, I failed to stop out of my losing position at several points that would have been logical exit opportunities. But I did take a relatively small position size, which made my total loss on the trade tolerable.

Losing money is never fun, but it is an integral part of trading. The greatest traders in the world don’t win 100% of the time. Everyone loses. The trick is to manage your risk so that no loss takes you out of the game or makes it impossible to recover from.

Even though my TEAM trade was a bad one and the I felt the pain of losing money, because my position size was small, I could take the loss and move on without suffering any permanent damage to my account.

Position sizing is your arguably your most powerful risk management tool in that it is totally in your control. Only you can decide how many shares or contracts you’ll trade. If you are unsure about the trade, you can minimize your risk my simply sizing down from your normal risk amount. You can also size up if you believe the stars have all lined up in your favor.

In the TEAM trade, I knew I was getting into a risky position so I sized down — although in hindsight, I probably should have sized down even more based on the riskiness of the setup.

Bottom Line – Lessons Learned

Here’s what I learned from my losing TEAM trade:

  1. Make a trade plan and follow it.
  2. Determine a timeframe and base your exits on the charts appropriate to that timeframe.
  3. Don’t let FOMO get the best of you — DON’T CHASE. The market will give you plenty of other opportunities.
  4. Don’t be afraid to stop out and take a small loss before it turns into a big one.
  5. Size your position accordingly, to manage your risk.

UPDATE – 2/16/23

As of this morning, TEAM was trading at just over 187. That’s over 30 points than what I bought it at on my bad trade day. Had I followed the right timeframe, that flow that I initially followed to enter the trade would have paid off nicely, as I’m sure it did to the buyer of those call positions.

Here’s today’s daily chart:


What Really Makes a Stock Move Higher or Lower?

Wouldn’t it be great if you knew whether a particular stock was going to do go up or down?

Unless you have some very reliable, market moving, information, you can only make an educated guess about which way a stock will move.  Your guess will have to take into account numerous factors that can make a stock move, including news, changing company fundamentals, macro economic and political developments, systemic market conditions, competition and a host of other things that could effect the stock price.

Market Movers

While all of these factors are important and warrant close analysis, they are all indirect causes of a stock moving. The direct cause of any stock move is massive buying that totally overwhelms the selling supply and forces the price to move higher. As long as the buying demand surpasses the selling supply, the stock price will continue to increase. When this situation reverses and sellers overwhelm buyers, the stock will begin to drop and continue dropping until the buyers return in force.

Who do you think is doing the brunt of that buying and selling?

It’s not retail traders like you and me. Retail traders make up a very small percentage of volume in the financial markets. The majority of the buying and selling volume is done by market makers, institutions, hedge funds, pension and mutual funds — otherwise known as the Smart Money.

The smart money is the only body that can move stocks and markets. They buy low and sell high.

How it Happens

In order for the smart money to buy in quantity, otherwise known as accumulation, they need to make sure that the stock price is cheap enough. To do that they will step aside to dry up demand and let the stock drop. They will also short the stock, using any kind of bad sounding news as a cover for the price drop. They might also plant some bad news or rumors, or release some negative commentary in the media, to get you to sell sell sell.

Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that, “the time to buy is when there’s blood in the streets.”

When investors are panic selling as if the end of the world has arrived is precisely the time that the smart money is buying, at fire sale prices.

This smart money buying will often appear on a stock chart in the form of a “Hammer Candlestick“.

hammer candle

This candlestick is usually accompanied my massive volume and indicates that buyers have stopped the downward movement and have overwhelmed the sellers and succeeded in moving the price higher from the low.

News or fundamentals did not drive the price down, causing you to panic sell. These factors provided the perfect opportunity for the smart money to drive the price down and shake you out, so that they could then buy.

The smart money buying might not cause the stock or market to reverse immediately. That’s because they want to buy as much stock as possible at cheap prices — so they will not push the price higher until they have the inventory they want.

They also will need to test the market to see if the sellers have fully been exhausted and there is no large supply of stock still waiting to be sold. To do this they will push the price up a little and see if there is selling pressure. This is known as a low volume retest.

Once the smart money has finished accumulating their stock, they will start moving the price higher, which will not be difficult since the there’s no one left to sell and stop the rise. This upward move will often coincide with a slew of good news that will make other traders feel comfortable to buy too.

As the stock continues to rise and the press and pundits continue to pump it, the retail community will enthusiastically jump on board and start buying aggressively, not wanting to miss out on the party. It’s usually at this point that the smart money will start selling (distribution), having made a hefty profit.

At the height of the euphoria, as retail continues to pile in out of pure FOMO, the smart money will complete their selling. Guess what happens next? Rinse and repeat.

Bottom Line

After all is said and done, stocks and markets are moved by smart money buying and selling. 

If you watch the markets closely you’ll be able to identify when they’re doing their work and join them, instead of being on the other side of their trade. You can do this my carefully wanting price action and volume, options flow, insider transactions and general market sentiment.

When things get too hyped, it’s time to start thinking about buying. When there’s “blood in the street”, it might be the right time to start buying.

How to Trade in a Market Driven by Algos and Smart Money?

Imagine that you’ve just bought some call options on the SPY or SPX, based on your analysis of the price action and a clear chart pattern you’ve identified. You’ve calculated your risk reward, gotten the perfect entry and set your stop loss at an appropriate level. You’re confident that the probability is in your favor. And now you wait to see whether the market will agree with your directional view.

The next couple of candles head in the right direction and you’re getting excited for the move to continue higher. Everything is looking peachy until, out of nowhere comes the biggest candle you’ve every seen ripping to the downside with a correspondingly robust volume bar, destroying your bullish trading thesis and taking out your stop, along with thousands of others. About a minute later, the price action has fully rebounded and made a higher high.

You leave the trade feeling dumbstruck, frustrated and violated. Your original thesis was correct. You had everything lined up perfectly. So what happened?

Algo Trading

Algo, or algorithmic, trading is when computers are programmed to automatically place trades based on algorithms.

In the U.S. equity market, European financial markets, and major Asian capital markets, algorithmic trading accounts for about 60-75 percent of the overall trading volume.

These algos have no emotions. They don’t get nervous or frustrated, and they don’t second guess themselves. They simply buy and sell when their algorithms are triggered.

There are news algos that trigger based on the words in a news story. Before you even hear about the news, the algos of the “smart money” (market makers, institutions, major money managers and traders etc) will act on it and either buy and sell. You’ll see that massive candle soaring or diving before you have any idea as to why.

algo candle

There are algos programmed to trigger based on keywords in statement made by the Fed or other market moving personalities. You’ll be listening to Chairman Powell answer a question during a press conference and he’ll use a certain adjective and suddenly — here come the monster candles.

There are algos that trigger at major support or resistance levels, which is why you will often see massive buying or selling programs at these levels.

Countering Algo Candles

While there’s no way to know when and how algorithmic selling and buying programs will trigger, there are some ways to counter their effects or keep from getting run over by them.

    1. Don’t let FOMO get the best of you when you see those huge algo candles bursting higher on a piece of news. In most cases those price spikes will reverse and come back down to earth, with force. There could be various reasons why this happens:
      • the news was fake
      • the reaction to the news was very overblown
      • the smart money planted the news and ran up the price in order to get retail traders to FOMO buy, in order to unload their own long positions.

      Give things time to shake out and see if the jump in price holds and then continues with volume. If it turns out to me a real move higher on legitimate news, then you can consider going long. If you want to play a riskier move, you can wait for the price to peak and then go short. Of course, the price can continue to move higher.

    2. Don’t day trade around scheduled market moving events, like Fed speak and economic data releases. These events usually trigger major algo driven moves, which will most likely stop you out. Wait until after the algo candles have triggered to evaluate the market and decide to enter a position.
    3. If you’re trading during headline driven times, trade with smaller positions to manage your risk in the event that you get caught on the wrong side of an algo candle.

Avoid Fake Outs

The Smart Money, particularly market makers, can move the market up or down for brief periods on low volume. They do this in order to find the inventory they need to fill their own buy or sell orders at the very best price.

For example, say a smart money trader wants to buy 100,000 shares of XYZ stock, currently trading at 90, because he knows that the stock is due for a pop. Let’s assume that filling 100,000 shares will cause the prices of XYZ to moves 3 points. In fact, other traders might see the stock start moving higher and start buying because they think the stock is breaking out, which could push the stock even higher. Therefore, the trade might end up costing hundreds of thousands of dollars more than if the entire order could be filled at 90.

Instead of trying to buy XYZ at 90, the smart money trader will start selling a smaller number of shares to drive the price down. Let’s assume there’s a support level at 87, beneath which traders have most likely placed stop orders. The smart money stock selling will trigger the sell orders, a technique known as stop hunting.  When retail traders see the price break below the support level, many will think that the stock is breaking down and will sell, driving the price even lower. This is when the smart money trader will take the other side of all of those sell orders and purchase his 100,000 shares a few points below the original 90.  Then the stock will reverse and head back higher, leaving the smart money trader with a tidy profit and the retail trader with a frustrating experience.

The only way to try to avoid getting faked out by the smart money orchestrated price drop is to look at the volume of the move. If the relative volume is low, you can assume that there’s a good chance the move is a temporary manipulation. You try to avoid getting stopped out by placing your stops some distance from the usual areas where stops are often clustered.

Play Along

You will never beat the smart money. But you CAN try to follow along with them by either taking the opposite sides of their low volume fake out moves, or by following their large trades as identified by tools such as blackboxstocks.





You Can’t Beat the Smart Money. So Why Not Join Them?

The US financial markets and exchanges are regulated and policed by the government to prevent fraud, illegal manipulation and other unsavory practices and to make sure that they present a fair playing field for all participants, no matter how small.

But there’s plenty of legal market manipulation that occurs all day, everyday, by the so called “smart money” — financial institutions, market makers, fund and portfolio managers and other large-scale professional traders that manage billions of dollars and make huge trades requiring massive amounts of liquidity, that literally move markets.

To get their liquidity and buy or sell their stocks at the very best prices, the smart money will often cause violent price spikes (in either direction) around obvious support or resistance levels in order take out the clusters of stop orders they know are gathered slightly below or above these areas — a technique commonly known as stop hunting. Retail traders will either get stopped out or get tricked into following the price move, thinking that it is an actual breakout, only to then watch the price violently reverse in the opposite direction. That’s when the retail trader exits the trade with a loss, only to see the price reverse again and continue in the original direction to confirm the breakout.

Here’s a video that explains a bit about how the smart money operates at your expense:

This smart money manipulation can play out on intraday as well as longer term charts. Where there are defined levels containing clusters of stop orders, there will be smart money attempts to hunt those stops and create false breakouts to lure in retail traders.

How do you deal with this smart money manipulation and come out a winner?

Long Term

If you’re a long term, buy and hold, investor, you most likely won’t be effected by the smart money monkey business because you’ve ostensibly bought your position based on long term fundamentals and are not looking at short term market moves. However, your initial entry could be effected by smart money moves, which could then effect your overall return on investment.

For example, you might get into a long term Apple position at 150 on what looks like a strong break above resistance, only to see the stock reverse and drop 20 points over the next few weeks. Since you’re a long term investor you’ll hold onto your position and might eventually end up making a lot of money. But wouldn’t you rather have bought Apple at 130 instead of at 150?

Shorter term traders swinging position over several months will probably also not get affected, since the smart money spikes will be smoothed out by the market over time, unless they have stops placed at the likely hunting ground locations, in which case they will be hunted like any other victim.


Intraday traders have the most to fear from smart money hunting expeditions, since they are often seeking to exploit small fluctuations in price action. This is exactly what the smart money wants them to do, because guess who is causing those fluctuations and who is on the other side of the average day trader’s trade?

Day traders will also often use tight stops, to avoid big losses, which then become easy prey for the stop hunters. Midday or lunch time in NY is usually a low volume choppy time period during which traders can get their accounts chopped down to size by try to catch upside or downside moves that end up reversing, taking out stops and then moving back up in the original direction. And rinse and repeat.

So what can day traders do to avoid getting cut to shreds by the smart money?

  1. Watch the volume of the price action.
    Just because price crosses a level of support or resistance that you are watching should not indicate a buy or sell signal. A move on light volume can likely be a fake out. Look for big volume on the move to indicate that the move is real. Or look for a pullback to the original support or resistance level to see if it bounces or continues. Then you can decide whether to take the trade and in which direction.
  2. Think like the smart money
    When price spikes just a hair above established support or resistance levels on light volume, instead of jumping into the trade in the direction of the spike, assume that the smart money is stop hunting and enter the trade in the opposite direction — along with the smart money.

    I’ll never forget the time I got long a call on one of this price spikes only to watch the price reverse almost immediately. I realized I had just been faked out, and looked at the option price in order to get out and see how badly I was down. I saw the price of my option going up and was confused, until I realized that I had made an error in entering the trade and had bought a put instead of a call. I got out of the trade immediately with a slight gain, because I don’t like being in a trade without a proper plan. My carelessness saved me from a loss and reinforced the lesson of trading with the smart money, not against it.

  3. Follow smart money trades
    A wise man ones said, “if you can’t beat ’em, join ’em.” This holds very true in the financial markets. If the smart money has way more information and resources to make winning trades than you can ever dream of, the only way to win in the market is to follow them, not try to outsmart them.

    Don’t swim against the current. Stay in the river, become the river; and the river is already going to the sea. This is the great teaching.

    — Rajneesh (famous Indian Guru)

    There are many companies and traders that offer software that scans the markets in real time for large stock or options trades. I personally use one called BlackBoxStocks which, among other things, scans for large options trades in real time. The assumption is that options trades totaling hundreds of thousands or millions of dollars are likely institutions or other smart money traders. Depending on the size of the trade and the urgency of the entry (ex. many large trades in a short span of time on or above the ask price), I can decide whether I want to follow the smart money into the exact same position as they have.

    Nothing is a sure thing. The smart money can be wrong or just putting on a hedge position or a crazy bet that they don’t mind losing. Trying to follow the smart money is only a way to try and increase your probability of success. Isn’t that what trading is all about?

Bottom Line

Don’t fight the smart money. They will beat you every time. But if you can figure out how they operate, you can try to follow them into and out of their winning trades instead of simply being their source of liquidity and the prey of their hunted raids.

Additional Factors to Watch When Trading Oil and Gas Stocks

When trading stocks or stock options intraday or short term, you need to make entry and exit decision based on various criteria, which will be different depending on your personal style of trading and preferences. These criteria could include stock or sector related fundamentals or headlines, price action, volume, technical patterns and indicators and the overall market action.

When trading oil and gas related equities, there’s an addition factor that you need to take into consideration:

  1. the oil and gas futures markets.
  2. macro and geopolitical events

These two factors are directly related, since the futures will reflect and be effected by macro and geopolitical events.

Oil and Gas stocks are therefore effected both by general market conditions and movements, since they are part of the major indexes such as DOW, S&P or Russell 2000, as well as by oil and gas futures and the macro events that move them.

Analyzing price action or technical setups is not enough to get into an energy stock trade. You must take into account futures and events factors to properly manage your risk. This becomes even more vital during times of energy related volatile, which we are experiencing right now as a result of the Russia-Ukraine conflict, China lockdowns and general supply shortages stemming from reduced production during the Covid period and political opposition to fossil fuel exploration.

In this type of volatile energy environment, a trader swinging a position overnight must accept and prepare for the possibility that an unexpected geopolitical event can occur that can drastically impact your position.

For example, let’s say you sell short shares, or buy puts, of Chevron (CVX) for a short term swing trade based on technical factors in the chart that you think look favorable for a move lower. You place a stop order at what you feel is an appropriate level for your risk management. You wake up the next morning to find out that the Russians have decided to cut all gas supplies to Western Europe because a British made missile, fired by the Ukrainian army, hit and destroyed a Russian munitions depot.

The S&P futures are flat on the news, but crude oil futures are ripping higher. CVX has gapped several points above your stop in the pre-market. There’s nothing you can do with your options premarket, which are probably close to worthless anyway, especially if they are weeklies. You decide to wait and see what happens to the stock when the market opens. In any case, your risk management is useless at this point and you are left with the choice of covering your position at a significant loss or turning your short term swing into a longer term hold, if you are still confident in your trade thesis and believe that the price spike will just be temporary.

If you were long the stock then I guess you’d be jumping for joy. But that would just be dumb luck, and basing your trading career on dumb luck is not a recipe for continued success.

If you do want to swing energy names in this volatile market, one way to mitigate your headline risk is to size down your position size so if there is a surprise, you won’t get hurt in a significant way. You can also hedge your stock position with options or futures, and your options positions with spreads.

The same risks also apply to intraday trading, when a story about a new OPEC plan to increase supply can send a stock plunging in seconds, or a pipeline breakdown can send that same stock soaring.

There’s really no way to defend against unexpected market moving events, other than the usual risk management techniques. But if you decide to trade oil and gas names, be aware that your breakouts and patterns and other technical theories will be rendered void and useless in the face of a macro or geopolitical news event.

Should You Use Stops in Your Trading

The question of whether or not to use stops in your trading relates to the form of stop rather than to the concept of a stop. I don’t think there’s a trader out there who would not advocate having a stop level or price at which to close a losing position.

There are two main reasons to have a stop:

  • Capital Preservation
    The most important part of trading is capital preservation. You must protect your capital in order to be able to continue trading. You can’t win if you’re not in the game.
  • You’re Wrong
    You enter a trade because you think stock, option or future will move a certain way — up, down or sideways. Your trade thesis might be based on technicals, momentum, news or just a dumb luck guess. If that trade thesis proves to be wrong, and the trade starts working against you, you have a choice to make. You can either stick to your thesis and ignore what the market is telling you, or you can admit that your thesis did not unfold as planned and close your position. The first option can lead to enormous losses or a total account blowup. The second option lets you move on to the next trade with a healthy mind and account.

Therefore, every trade needs a stop, to protect your capital and to get out of a trade thesis that didn’t pan out.

Form of Stop

Most “Stops” are actually orders placed with brokers to execute when the financial instrument hits, or passes thru, a specified price. Every trading platform has the “stop” order option. These stop orders are usually placed below (for longs) or above (for shorts) established support or resistance levels or popular moving averages. Since all traders are looking at the same support and resistance levels and moving averages, it’s common for stops to be piled up around these levels.

As a result of these stop order clusters, large traders, institutions and market makers can “hunt” for them and trigger the stops in order to fill their own large buy or sell orders. These large players are seeking liquidity, and stop orders help provide that.

To avoid getting caught in this stop hunt, many traders will place their stop orders some distance away from where they think the stop clusters are located. Just a few ticks will probably not do the trick, so they need to go a bit further out. The problem with this is that placing a stop too far from your entry can result in an unfavorable risk reward ratio for your trade. So you need to balance getting “stopped out” with risking more than you planned to. Ideally, you should calculate the position of your stop before you get into a trade and size your position appropriately to only get into trades that have the risk/reward you are comfortable with.

The idea that the bog boys are hunting for your specific stop order is silly, because they are seeking large positions to provide their liquidity needs.  It’s the location of your stop orders that is what is making you a victim of the stop hunt.

The alternative to placing a stop loss order is simply having a mental stop. When the financial instrument hits your level, you will manually close your position. That way you won’t expose your order to the stop hunters and you’ll also be able to possibly stay in the trade longer by watching the price action and giving yourself a bit more leeway.

The problem with a mental stop is that you might end up not executing it because you either weren’t paying attention to your position or you let your emotions override your trading plan and risk management rules. Also, if your mental stop is in the same area as you would have placed your stop order, then you have nothing to gain for not actually placing the order and you might as well just let things play out without your emotions getting in your way.

Using Stop Hunting to Your Advantage

Instead of worrying about institutional traders hunting for your stops and not setting them, or placing them too far below or above your ideal level, you can try to use stop hunting to your advantage by following along with the hunters instead of fighting them.

If the hunters are going to take out a cluster of stops below a support area in order to provide the liquidity they need fill their buy orders, then it would seem like the ideal point to go along with them and BUY. If they surge to the upside to take out the shorts, then it could be the right time to go short on the surge — just like the big boys are doing.

Most retail traders tend to end up doing just the opposite of what the pros are doing. For example, on a huge spike through a resistance level, retail traders will tend to jump in long immediately on the break, not wanting to miss the breakout. Unfortunately, they often end up buying at the tippy top of the surge, which then comes right back down to the former resistance level and a bit lower. That’s usually the spot where most traders have placed their stops, since that spot would indicate that the breakout was a failure. So the stops get hit and the price jumps right back up and beyond.

Stop being like most retail traders and try to get on the same page as the pros.

Buy when they buy and sell when they sell.

Here’s a video that talks about this very point:

Bottom Line

Regardless of what you decide to do, always make sure you at least have a stop at the maximum amount you’re willing to lose, because you don’t want to get caught in a major move that causes severe damage to your account — or wipes you out completely.