One of the best tools to have in your trading kit is learning how to spot institutional money flowing in or out of a stock.
Once you learn how to identify and measure capital flow, you can use that information to your advantage by placing trend-following trades to take advantage of it.
Typically, what I like to do once I figure out where money is flowing in or out is find monthly options to match the flow.
If money is flowing in, I can buy the stock and/or call options. If money is flowing out, I can buy put options or sell the stock short.
The first step is to identify institutional volume. We have to make sure this isn’t your run-of-the-mill retail traders buying or selling the stock…
It needs to be the big boys… the ETFs… the mutual funds… the passive funds that put on billions and billions of dollars in stocks at the beginning of each month.
Why the beginning of each month? Because that’s when the big money starts accumulating whichever stocks they feel will be the hot names to be in and help push higher that that month.
So I look for a major uptick in volume during the first couple of days of the month, at least 50% above average over those two days, but I’m really hoping for 100%.
And like an elephant trying to hide in a convertible Volkswagen Beetle, these moves stick out like a sore thumb.
Then I compare the daily trading volume to the previous month’s average, and I want to see the price of the stock respond as a result of this big influx of volume.
The Stocks I Zero in On
When it comes to the stocks I want to buy or sell, I only focus on the big boys…
Large-cap names in the S&P 500, Nasdaq and Russell 2000.
I’m never looking for stocks that aren’t in one of these major indexes because we’re looking for names being accumulated in ETFs.
Now, I want to avoid stocks with falling or below average volume that aren’t in the major indices I just mentioned.
That’s how I avoid false setups.
So by following these steps, you’ll be well on your way to spotting where institutional money is flowing. That, in turn, opens a whole new avenue of trading possibilities when you start looking at options.
Jeff Zananiri
Jeff Zananiri Trading
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
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