SMT Divergence - ICT Concepts

Summary

This video explains the concept of Smart Money Techniques (SMT) in trading, focusing on how divergence between different assets can signal potential reversals. The presenter walks through various examples of bullish and bearish SMT, highlighting how to identify these divergences between indices like the S&P, Dow, and Nasdaq. SMT is shown as a confluence to support other trading models. The video further discusses how these divergences can be used in lower time frames for precise entry points, as well as how the presenter incorporates them into their trading strategy for price target predictions and risk management.

Takeaways

• 😀 An SMT (Smart Money Technique) occurs when there is a divergence in price action between correlated assets like the S&P and Dow.
• 😀 A bullish SMT happens when one asset makes a higher low while the other makes a lower low, indicating a potential reversal to the upside.
• 😀 A bearish SMT occurs when one asset makes a higher high while the other makes a lower high, signaling a potential reversal to the downside.
• 😀 SMTs can be identified by comparing the highs and lows of different indices or assets. A divergence in these structures indicates a potential shift in market direction.
• 😀 Using SMTs as a confluence for existing models can help traders refine their strategy and improve entry and exit points.
• 😀 A fair value gap (FVG) can enhance the relevance of an SMT, especially when the SMT occurs near these price levels, signaling strong reversal potential.
• 😀 For example, when the S&P makes a lower low but the NASDAQ does not, it forms an SMT that can indicate an upside move, which traders can use for potential long positions.
• 😀 Lower timeframes can provide more precise entries for trades based on SMTs, such as using deviations from ranges or specific order block setups.
• 😀 Traders can target lows or specific price levels after identifying an SMT and combining it with lower timeframe entry models to increase the trade's probability of success.
• 😀 The choice of index to trade when an SMT forms depends on which asset shows cleaner price action on the lower timeframes. A trader may choose the index that provides better liquidity or resistance profiles.

Q & A

What is a Smart Money Technique (SMT)?

A Smart Money Technique (SMT) refers to a divergence between different assets or indices that signals a potential reversal in price action. For example, when one asset makes a lower low while another makes a higher low, it can indicate a reversal, as smart money may be diverging from the typical market behavior.

How do you identify a bullish SMT?

A bullish SMT is identified when one asset makes a lower low while another asset forms a higher low at the same time. This divergence suggests a potential reversal to the upside, especially if it occurs at a low point in the market.

What does a bearish SMT indicate?

A bearish SMT occurs when an asset forms a higher high, but another asset fails to break its previous high and forms a lower high. This divergence suggests a possible reversal to the downside, as the market could be weakening.

Why is the concept of structure important when identifying SMTs?

Structure plays a crucial role in identifying SMTs because it allows traders to see the relationship between the highs and lows of different assets. A change in structure, such as one asset breaking a high or low while the other does not, marks the divergence that forms an SMT.

How do fair value gaps relate to SMTs?

Fair value gaps occur when there is a significant price movement without sufficient market structure or order flow. When an SMT forms within these gaps, it can add confluence to the reversal signal, suggesting that price will return to fill the gap or continue in the new direction indicated by the SMT.

How do you use SMTs in your trading strategy?

SMTs are used as confluence with other models in lower timeframes. When an SMT occurs, it can signal an entry point, and traders use this divergence in combination with other indicators (like order blocks or deviation setups) to time their trades and set appropriate targets.

What is the significance of using multiple timeframes in SMT trading?

Using multiple timeframes is significant because it allows traders to identify SMTs on higher timeframes for a broader market perspective, then fine-tune their entries on lower timeframes for more precise execution. This method helps in aligning both short-term and long-term market moves.

Why is it important to wait for confirmation when trading with SMTs?

Confirmation is important because it reduces the risk of false signals. For example, waiting for a confirmation model on a lower timeframe after spotting an SMT ensures that the market is actually reversing in the expected direction, rather than just a random fluctuation.

How does liquidity impact SMT-based trading decisions?

Liquidity plays a role in SMT-based trading because low liquidity can cause larger price swings and erratic behavior. Traders often use SMTs to identify where liquidity might be concentrated, allowing them to enter trades at areas with higher probability of success.

Can SMTs be used in all market conditions?

While SMTs can be used in various market conditions, they are particularly effective when combined with other technical analysis tools in trending markets. In ranging or volatile markets, SMTs may offer fewer reliable signals, so additional analysis is needed to confirm trade setups.