Smart money index (SMI) of smart money flow index is a technical analysis indicator demonstrating investors’ sentiment. The index was invented and popularized by money manager Don Hays. The indicator is based on intra-day price patterns.
The main idea is that the majority of traders (emotional, news-driven) overreact at the beginning of the trading day because of the overnight news and economic data. There is also a lot of buying on market orders and short covering at the opening.
Smart, experienced investors start trading closer to the end of the day having the opportunity to evaluate market performance. Therefore, the basic strategy is to bet against the morning price trend and bet with the evening price trend.
Sounds simple enough. The “dumb money” active in the morning, while the “smart money” work’s its magic near the close.
Check it out – The SP 500 is the top chart, and the “smart money” on the bottom.
Smart_Money_Forex_Kong
The smart money has been “selling into this rally” since June of 2012!
It’s not rocket science, as emotions tend to drive new traders / investors right into the hands of the more experienced.
If you’re “up and attem” in the mornings and can’t figure out why your trading isn’t going so well, perhaps it’s time to really question…….
Are you dumb?
Implementing Smart Money Principles in Currency Markets
Reading Smart Money Flow Through Currency Strength Divergence
While the stock market provides clear examples of smart money behavior, forex traders need to adapt these concepts to currency pairs where there’s no centralized exchange or traditional opening bell. The key lies in understanding when institutional players make their moves versus when retail traders pile in. Watch for divergence between currency strength and market sentiment indicators during different trading sessions. When EUR/USD rallies during the London open but the Dollar Index shows underlying strength building into the New York close, you’re likely witnessing the classic dumb money versus smart money scenario playing out in real time. Professional currency managers don’t chase breakouts at 8 AM London time when economic data hits. They wait, analyze, and position themselves when the retail crowd has exhausted their emotional reactions.
The most telling sign of smart money activity in forex comes through observing how major pairs behave during session overlaps. If GBP/USD spikes on UK inflation data during London morning hours but fails to hold gains as New York traders enter, institutional money is likely fading that move. Smart money understands that initial reactions to news events are often overdone, creating opportunities for those patient enough to wait for the real trend to emerge. This is why many successful currency traders avoid trading the first two hours of major session opens, particularly when high-impact economic releases are scheduled.
Central Bank Communication and Smart Money Positioning
Central bank communications offer perfect case studies in smart money behavior versus retail reactions. When the Federal Reserve hints at policy changes during morning press conferences, retail traders immediately jump into dollar positions, often in the wrong direction. Smart money has already positioned ahead of these events and uses the retail reaction as liquidity to either add to positions or take profits. The real smart money move happens in the hours following initial market reactions, once the emotional dust settles and institutional players can assess the true implications of policy shifts.
Consider how USD/JPY typically behaves around Bank of Japan interventions. The initial spike or drop gets all the headlines and attracts momentum-chasing retail traders. But watch the price action 4-6 hours later, particularly during New York afternoon hours. That’s when you’ll see smart money either confirming the move with substantial follow-through or completely reversing the earlier price action. Professional traders understand that central bank interventions are temporary measures, while underlying economic fundamentals drive longer-term trends.
Session-Based Smart Money Tactics for Major Pairs
Each major forex session has its own smart money characteristics that savvy traders can exploit. During Asian hours, smart money often positions for European economic data, creating subtle accumulation patterns in EUR/JPY and GBP/JPY that retail traders miss entirely. The London session brings volatility and emotion-driven moves that smart money uses for entries and exits. But it’s during the New York afternoon session, particularly the last few hours before the close, where the real institutional positioning becomes clear.
The overlap between London and New York sessions, roughly 8 AM to 12 PM EST, represents peak emotional trading when retail participants are most active and most likely to make poor decisions. Smart money often does the opposite of whatever appears obvious during these hours. If EUR/USD breaks higher on European data and retail traders pile in long, institutional players frequently use this liquidity to establish short positions that play out over the following days or weeks.
Macro Themes and Smart Money Currency Flows
Understanding broader macro themes separates smart money from the crowd more than any technical indicator. While retail traders focus on daily news and short-term price movements, institutional players position for multi-month trends driven by interest rate differentials, economic growth trajectories, and geopolitical developments. When emerging market currencies sell off on risk-aversion headlines, smart money often accumulates positions in quality currencies like the Swiss franc or Japanese yen before the broader market recognizes the trend.
The carry trade phenomenon perfectly illustrates smart money thinking in forex. While retail traders chase high-yielding currencies during risk-on periods, smart money understands that these trades work until they don’t, often unwinding violently when market sentiment shifts. Professional currency managers build positions gradually during periods of low volatility and unwind them before retail traders even realize the party is ending. This is why monitoring currency volatility indicators alongside traditional price charts provides crucial insight into when smart money might be preparing for major position changes.
I guess I am dumb …been shorting S&P 500 last few weeks and this thing just keep going up up.. and when I short more, it doesn’t give me even smallest correction or profit taking…nothing…
You just can’t go against unlimited money flowing in there, they can always print more and more. And guess what? Whole world just accept this, USD still accepted as reserve currency. Printing 1 Trillion/year? no problem. If they double it? still no problem….so at what point does this become a problem? 10 Trillion/year?
Ya it’s tough with a guy sitting at the table with 85 billion per month no doubt. Frustrating too as – you know the fundamentals are hooped.
I don’t think any of us truly know “how far it can go” but I can most certainly see a doubling if not tripling of the current stimulus in the U.S.
Knowing full well that Japan plans to increase, it’s near impossible to imagine that the U.S will stop.
It’s already become a problem now but, it’s too far gone – and the only viable option is to just continue down the path as politicians aren’t willing to make the “real changes” now.
Guilty as charged. Point taken.
It takes time and practice as ….the majority of people ( I don’t really understand the reasons ) are afraid to buy near the close, and as the SMI suggests – driven by emotion / excitement buying at the open.
Why not let the daily activities play out and make a better “educated decision” near the close?
Cuz you think you’ll “miss something” mostly.
That’s what the big boys depend on. You buying….when they’re selling to you.
Really broadening volatility starting roughly Nov 15 on EURJPY…..potential trade-able short term top probably over the next 24 hrs.
If it “ever comes”.
Unreal……EUR as well GBP vs JPY have been on my radar forever as….I can’t believe them! No end in sight!
When they turn, we “should” make some serious coin as even a 38% type retrace is some serious pips.
Oh and great post by the way. Interesting material. Ya not in GBPJPY yet but thinking of entering a position shortly. Ya these two are really stretched and in need of a shake out…..a potentially big shakeout.
I’ve taken profits here on GBP’s across the board.
Nice run on those GBP’s. I’m flippin the trade now and biting on some GBP/AUD and NZD shorts right now for some retracement action. Staying nimble though.
Kong, is this SMI based around the London or New York Close? Important as NY closes as I get up in the mornings in Oz.
Interesting.
I’m assuming NY but in all……I understand the math can be applied to any data / indice.
What are your thoughts Deano? You thinking that those trading in your time zone “skew” the data?
I guess so when you consider you’re “flipped upside right”, although as I stay up / get up to trade / observe the London open…I can only assume novice “emotional traders” on your side of the pond…still wanna “get right in there at the open” in U.S – you think?
I’ll do some homework, but have definitely noticed that the post London trading in NY is often a different direction to the Asian and London sessions, on lower volumes. Also there are different patterns to the early Asian trading (post NY) versus later when Shanghai opens, and then again when the Middle East opens (The Arabs love to throw their cash around, often irrationally it seems) before London opens. I’ve not seen too much retail emotionality at London open – thats dinnertime here and trading is quite light – so can’t tell you whether its smart or dumb!
You and I both.
I observe all kinds of “neat little pops n drops” as the 24 hour clock rolls by.
London open for me is 2.a.m, and I generally see the move around 3:30 – 5:30 area.
I think the sentiment trader SMI is moreso based in straight up NY stock trading so……as a measure of how things “generally work” with the young bucks “rushing the open” and the “ol guys” watching the close – I think it’s pretty standard.
Hey Kong WTF,you’re citing this shit straight out of Wikipedia, verbatim, and passing it off as yours…WEAK!
Copy and pasted, just like you…
“Smart money index
From Wikipedia, the free encyclopedia
Smart money index (SMI) of smart money flow index is a technical analysis indicator demonstrating investors’ sentiment. The index was invented and popularized by money manager Don Hays.[1] The indicator is based on intra-day price patterns.[2]
The main idea is that the majority of traders (emotional, news-driven) overreact at the beginning of the trading day because of the overnight news and economic data. There is also a lot of buying on market orders and short covering at the opening. Smart, experienced investors start trading closer to the end of the day having the opportunity to evaluate market performance.[citation needed] Therefore, the basic strategy is to bet against the morning price trend and bet with the evening price trend. The SMI may be calculated for many markets and market indices (S&P 500, DJIA, etc.)”
Where do you think I got the definition / description of the SMI? – I made it up?
Please…….I quote / pull info out of wikipedia all the time – isn’t that what it’s for?
Yes…you take your cursor , drag it over relevant material – then you push “copy” and then “paste”!
You’ve got it! You’ve done it!
I’d suggest all you have to do now – is start your own blog!
Genious!
( if anyone else “other” than this brilliant soul has a problem with that….by all means let me know ) Looking through the blog you’ll find “several” definitions / descriptions of things of a “technical nature” have been taken from Wikipedia – as ….well…..it’s a dictionary so…
the two times of the day i watch for signs of what serious stock traders are doing are 11:30am and 2:30pm
Stock wise that sounds about right to me.
Forex circles ( being that the market runs 24 hours a day ) are a bit different, as well depending where on the planet you are.
For me…..odd but I see some good moves around 11 p.m as well 3 a.m, corresponding to mid session Asia and the early morning open in London.
I “could” likely skip the entire day / U.S session if it wasn’t for a lot of the news / data releases.