ICT Forex - The ICT Smart Money Technique or SMT

Summary

In this lesson, the presenter introduces the ICT Smart Money Technique (SMT) Divergence, focusing on its application to the USDX and foreign currency pairs, particularly the Aussie Dollar. The lesson explores how to spot bullish and bearish conditions using SMT divergence, such as the dollar index's failure to make expected highs or lows in comparison to foreign currencies. Through examples and charts, the speaker demonstrates how these divergences signal accumulation or distribution, offering traders valuable insights into potential turning points. The video teaches how to identify market weaknesses and execute optimal trade entries based on these patterns.

Takeaways

• 😀 SMT Divergence is a key technique in ICT (Inner Circle Trader) strategy, helping to spot price movements by analyzing the relationship between the USDX and foreign currency pairs like the Aussie dollar.
• 😀 SMT Divergence identifies **bullish** or **bearish** trends based on discrepancies in price action between correlated assets, such as the dollar index and foreign currencies.
• 😀 In **bullish** conditions, if the dollar index fails to make a higher high while the foreign currency makes a lower low, it signals strength in the foreign currency, indicating accumulation.
• 😀 In a **bearish** scenario, when the dollar index makes a lower low and the foreign currency fails to make a higher high, it indicates underlying weakness in the foreign currency, suggesting distribution.
• 😀 Traders can spot SMT Divergence by comparing price action on the same timeframes (e.g., hourly or daily) between the dollar index and the foreign currency pair.
• 😀 The concept of **accumulation** and **distribution** is central to SMT Divergence, where price action reveals potential buying or selling opportunities in the market.
• 😀 SMT Divergence can be used to make informed decisions about when to enter trades, particularly by observing price movements in both the foreign currency and dollar index.
• 😀 The failure of a foreign currency to follow expected price patterns (e.g., not making a higher high or lower low) relative to the dollar index helps traders identify hidden trends.
• 😀 A **bullish** SMT Divergence occurs when the dollar index makes a higher high and the foreign currency fails to make a lower low, signaling that buying pressure is accumulating in the foreign currency.
• 😀 A **bearish** SMT Divergence happens when the dollar index makes a lower low, but the foreign currency fails to make a higher high, indicating potential weakness in the foreign currency and creating opportunities to sell.
• 😀 SMT Divergence requires careful observation of market price action over time and the relationship between correlated assets, which can help traders detect underlying market sentiment and adjust their strategies accordingly.

Q & A

What is the primary focus of this lesson on ICT SMT divergence?

The primary focus of this lesson is to explain the ICT Smart Money Technique (SMT) divergence, specifically its application in both bullish and bearish market conditions, with a focus on the USDX and foreign currency pairs like the Aussie dollar.

What is SMT divergence, and how does it work in market analysis?

SMT divergence refers to a situation where there is a discrepancy between the price movements of correlated assets. For example, when the dollar index fails to make a higher high while a foreign currency makes a lower low, or vice versa, indicating underlying strength or weakness in one asset compared to the other.

Why is the relationship between the dollar index and foreign currency pairs important in SMT divergence?

The relationship between the dollar index and foreign currency pairs is important because the behavior of one can indicate potential price movements in the other. For example, if the dollar index is making higher highs, but a foreign currency fails to make lower lows, it signals buying pressure in that currency, even if the dollar index suggests strength.

How can SMT divergence help identify potential turning points in the market?

SMT divergence can help identify turning points by highlighting discrepancies in the price movements of correlated assets. When one asset behaves differently than expected relative to its correlation with another, it suggests a shift in market conditions that could lead to a price reversal.

What is a bullish scenario in SMT divergence, and how is it identified?

A bullish scenario in SMT divergence occurs when the foreign currency (e.g., the Aussie dollar) fails to make a lower low while the dollar index makes a higher high. This indicates underlying buying pressure in the foreign currency, suggesting a potential upward move in its price.

How do liquidity pools play a role in SMT divergence analysis?

Liquidity pools are areas where price tends to accumulate or consolidate before making a significant move. In the context of SMT divergence, liquidity pools are used to identify potential entry points where the market may reverse, especially when they coincide with SMT divergence patterns.

What does the failure of the Aussie dollar to make a lower low signify in the context of SMT divergence?

The failure of the Aussie dollar to make a lower low while the dollar index makes a higher high indicates that the Aussie dollar is being bought up. This is a sign of strength in the Aussie dollar, despite the overall bullish behavior of the dollar index, which suggests accumulation in the Aussie dollar.

What role does the price structure and order blocks play in identifying SMT divergence?

The price structure and order blocks are key to identifying SMT divergence. In this example, the daily and weekly price action of the Aussie dollar, along with the identification of bullish order blocks, helps pinpoint areas of potential accumulation and possible entry points when SMT divergence is observed.

How does the use of the dollar index enhance the accuracy of SMT divergence analysis?

Using the dollar index alongside the foreign currency pair enhances the accuracy of SMT divergence analysis by providing a clearer picture of the overall strength or weakness of the dollar, which can then be used to interpret price action in the correlated foreign currency pair.

Can you provide an example of a bearish SMT divergence scenario?

A bearish SMT divergence scenario occurs when the dollar index makes a lower low, but the foreign currency (e.g., the British pound) fails to make a higher high. This indicates that the foreign currency is weak despite the lower low in the dollar, suggesting a potential for a bearish move in the foreign currency, which could be exploited for short trades.