Smart Money Divergences (SMT) - ICT Concepts

Summary

This video explains Smart Money Trading (SMT) divergences, focusing on how the S&P 500 and Nasdaq often track each other but sometimes diverge in their movements. The video covers identifying divergences, such as one market making higher highs while the other makes lower highs, and how to trade these patterns. Two methods of trading SMT divergences are explored: entering on the diverging market and risking the lows or highs, or waiting for a lower time frame entry after a market structure shift. The video also emphasizes the importance of using higher time frames for reliability.

Takeaways

• 😀 SMT divergences occur when two markets, like the S&P 500 and Nasdaq, move in opposite directions, creating divergence in market structure.
• 😀 Market structure in SMT divergences is identified by comparing higher highs, lower highs, higher lows, and lower lows between the two assets.
• 😀 A key divergence example is when the S&P 500 makes a lower high while the Nasdaq makes a higher high, indicating a divergence.
• 😀 Another divergence can be seen when the Nasdaq makes a higher low and the S&P 500 makes a lower low, signaling another type of divergence.
• 😀 To trade SMT divergences, the ideal scenario is to wait for liquidity grabs or points of interest that coincide with the divergence.
• 😀 Higher timeframes are generally more reliable for SMT divergences, but a 15-minute chart is preferred, though 1-minute charts can also be useful.
• 😀 When trading a bearish divergence, the weaker market (making lower highs) should be traded, like the S&P 500 in the given example.
• 😀 Conversely, when trading a bullish divergence, the stronger market (making higher lows) should be traded, such as the Nasdaq in the example.
• 😀 One way to trade an SMT divergence is to enter on the diverging market, risking the lows or highs, with those levels being your stop.
• 😀 An alternative method involves waiting for a market structure shift on lower timeframes (1-5 minutes) and entering when a fair value gap appears.
• 😀 The safest entries involve waiting for the market structure shift, then looking for a fair value gap, though this may not always occur.

Q & A

What is the main focus of the video?

The video focuses on Smart Money Trading (SMT) and the concept of SMT divergences, explaining how to identify and trade them.

What does it mean when the S&P 500 and Nasdaq track each other?

The S&P 500 and Nasdaq usually move in a similar direction, following similar market structure patterns, such as lower lows and higher highs.

What is a divergence in the context of SMT?

A divergence occurs when the S&P 500 and Nasdaq exhibit differing market structures, for example, one making a higher high while the other makes a lower high.

Can you give an example of a divergence in the market structure?

Yes, an example is when the S&P 500 makes a lower high while the Nasdaq makes a higher high. This is a divergence between the two indices.

What are the two types of divergences mentioned?

The two types of divergences discussed are bearish divergence, where the S&P 500 shows lower highs and the Nasdaq shows higher highs, and bullish divergence, where the S&P 500 shows lower lows and the Nasdaq shows higher lows.

How do you identify the stronger market during a divergence?

In a bearish divergence, the weaker market is the one making lower highs (e.g., the S&P 500), while in a bullish divergence, the stronger market is the one making higher lows (e.g., the Nasdaq).

What is one way to trade SMT divergences?

One way to trade SMT divergences is to enter the trade on the market showing the divergence, and set a stop loss based on the highs or lows of the divergence. If those levels are broken, the divergence is invalidated.

What is another method to trade SMT divergences?

Another method involves waiting for a market structure shift on a lower time frame (e.g., 1-5 minute charts) and looking for a return to a fair value gap for a safer entry.

Why is it important to use higher time frames when trading divergences?

Higher time frames, such as the 15-minute chart, are generally more reliable for spotting SMT divergences because they offer clearer and more stable market structure patterns.

How does the concept of a fair value gap contribute to the trading strategy?

A fair value gap can provide a better entry point after identifying a market structure shift, allowing traders to enter at a more favorable price and reduce risk.