Richard D. Wyckoff carefully studied the Smart Money traders of his time and discovered that all markets are moved by the big players he called the Composite Operator (CO). Of course there are many deep pocket traders who make up the CO, but it is much easier to consider them all as a single entity. Among these traders are Market Makers, Specialists, Institutions, Large Traders (see The COT Report) who provide liquidity for Commercials hedging a market, and, with the ever advancing computer systems, Dark Pools, and the mathematical whizzes known as Quants.
Simply put, Wyckoff felt that an experienced judge of the market should regard the whole story that appears on The Tape as though it were the expression of a single mind. He felt that it was an important psychological and tactical advantage to stay in harmony with this omnipotent player the so-called composite operator. “The successful trader must endeavor to ascertain what is in the back of the head of that fellow and to anticipate his moves; for he is constantly expressing his intentions by what he does and the way he does it; by the urgent or leisurely character of his buying or selling; by the volume of the stocks he deals in, the width of their swings, especially in the leaders.”
Referring to this group as Smart Money has advantages. Whether Smart Money is working as an individual such as a Market Maker or a group of analysts within an institution such as a bank, they have more information, extensive training and experience, super computers with massive amounts of data, and a huge fund of money. They do not have to be in direct communication to work as a CO, but their goals are the same – profit. Combine this with the same or very similar conclusions about the present state of supply and demand and their moves in the market will naturally seem coordinated and this coordination will result in the massive movement of funds. (Some who specialize in the Forex markets think these markets are too big for SM to manipulate – that is their lose. (pun intended))
Before moving on, it is important you thoroughly understand this concept of the SM trader. As an individual or group in an institution, they are first and foremost SMART. They do not work haphazardly or intuitively. They plan and then launch, with military precision, a campaign to get their price. Who do they get their price from? The herd. So this “campaign” is psychological in nature.
Basically they all work the same way and it adds up to one entity: SM, with lots of money. By studying the actions and reactions of SM you can understand their behavior. By learning their methods for conducting a campaign, you can follow them and add your money to theirs when they make a move.