ICT Smart Money Technique (SMT) Divergence for trend reversal and trade entry

Summary

In this video, Solomon King explains the concept of SMT Divergence (Smart Money Technique Divergence), a powerful tool for identifying price manipulation in financial markets. By analyzing the correlation between two assets, one acting as a benchmark and the other as the underlying asset, traders can spot when smart money is manipulating the market. The video demonstrates how to use SMT Divergence for trade entries, highlighting key patterns and providing practical examples with real market charts. Viewers learn how to detect potential reversals and improve their trading strategy with this technique.

Takeaways

• 😀 SMT Divergence is a Smart Money Technique used to identify market manipulation by large institutional traders.
• 😀 It involves spotting variations in the correlation between two positively or negatively correlated assets.
• 😀 To use SMT Divergence, you need two correlated assets, one as a benchmark for price movement and the other as the underlying asset.
• 😀 A positive correlation means the assets move in the same direction, while a negative correlation means they move in opposite directions.
• 😀 SMT Divergence occurs when an asset forms a higher high while its correlated asset fails to form a lower low, or vice versa.
• 😀 SMT Divergence indicates potential manipulation by smart money, targeting stop losses or liquidity pools to reverse market prices.
• 😀 The example used in the video involves GBP/USD (a trading pair) and the DXY (U.S. Dollar Index), showing how the correlation can indicate smart money moves.
• 😀 In a negatively correlated scenario, a higher high in GBP/USD should be mirrored by a lower low in DXY; any deviation indicates SMT Divergence.
• 😀 Once SMT Divergence is spotted, it suggests that the market may reverse, making it a potential entry point for trades after confirmation.
• 😀 SMT Divergence can be identified on any timeframe, from 15-minute to 4-hour charts, with proper confirmation helping ensure accuracy in trade entries.
• 😀 Smart money manipulates price by reaching out for stop losses, and understanding SMT Divergence can prevent traders from falling for fake breakouts.

Q & A

What is SMT Divergence and why is it important in technical analysis?

SMT Divergence, or Smart Money Technique Divergence, is a method for identifying where institutional traders (smart money) are manipulating the price of an asset. It helps traders detect areas where price movements are influenced by smart money actions, such as stop hunts or liquidity pool targeting. This concept is crucial for understanding market manipulation and entering trades with higher probability of success.

What does it mean when two assets are positively correlated?

When two assets are positively correlated, they move in the same direction. A rise in one asset typically corresponds with a rise in the other. In the context of SMT Divergence, positively correlated assets should move together, and any divergence in their price movement can indicate a manipulation by smart money.

How does SMT Divergence apply to negatively correlated assets?

For negatively correlated assets, if one asset moves up, the other should move down, and vice versa. SMT Divergence is observed when this expected negative correlation is broken, with one asset not following the expected movement of the other, which could indicate that smart money is manipulating the market.

What is the role of the benchmark asset in SMT Divergence?

The benchmark asset is used to determine the expected price movement. It sets the direction for the correlated underlying asset. By observing the benchmark asset, traders can spot divergences when the underlying asset fails to follow the expected pattern, signaling potential smart money manipulation.

Can you explain the concept of a 'failure swing' in the context of SMT Divergence?

A failure swing occurs when an asset is expected to form a certain price movement (like a higher high or lower low) but fails to do so. This discrepancy between the expected movement and the actual price behavior is a key indicator of SMT Divergence, signaling that smart money may be influencing the market.

What is a typical example of SMT Divergence using GBP/USD and DXY?

In the example of GBP/USD and DXY, the expected behavior is that when GBP/USD forms a higher high, DXY should form a lower low due to their negative correlation. However, if GBP/USD forms a higher high but DXY fails to form a lower low, this is a sign of SMT Divergence, indicating that smart money may be manipulating price.

How does the failure of DXY to form a higher high signal SMT Divergence?

If DXY fails to form a higher high when GBP/USD forms a higher high, it breaks the typical negative correlation between the two assets. This failure indicates that smart money is likely manipulating price, potentially targeting stop-losses or liquidity pools. Traders can use this information to anticipate a price reversal.

Can SMT Divergence be used across different timeframes?

Yes, SMT Divergence can be used on various timeframes, from longer timeframes like the 4-hour chart to shorter ones like the 15-minute chart. It provides a final confirmation for trade entries, but it is important to combine it with other analysis tools for more accurate predictions.

What is the importance of using multiple analysis tools alongside SMT Divergence?

While SMT Divergence is a powerful tool, it should not be relied upon solely for trade decisions. Combining it with other analysis methods, such as trendlines, volume analysis, or other indicators, provides more confirmation and reduces the risk of false signals, ensuring a higher probability of successful trades.

How can SMT Divergence help traders avoid fake breakouts?

SMT Divergence can help traders identify fake breakouts by revealing when price movements are being manipulated by smart money. When an asset breaks out of its expected range but the correlated asset fails to follow the same movement, it's often a sign that the breakout is false and likely to reverse, providing traders with an opportunity to enter in the opposite direction.