This ONE ICT Concept Will Change Your Trading - SMT Divergence

Summary

In this video, the concept of SMT (Smart Money Technique) Divergence is explored, showcasing how it can validate trading decisions. By identifying differences in price movements between correlated assets like NQ and ES, traders can spot bullish or bearish signals. The video emphasizes using SMT in combination with lower timeframes, order blocks, and fair value gaps for precise trade entries. With practical examples and a focus on improving win rates, the video offers valuable insights for both beginners and experienced traders looking to enhance their strategy.

Takeaways

• 😀 SMT Divergence is a crucial concept in validating trades and can significantly improve your win rate in trading.
• 😀 SMT (Smart Money Technique) Divergence occurs when correlated assets move in different directions, signaling potential trade opportunities.
• 😀 A bullish SMT divergence is observed when one asset makes a higher low while the other makes a lower low, suggesting a potential upward move.
• 😀 A bearish SMT divergence is observed when one asset makes a lower high while the other makes a higher high, signaling a possible downward move.
• 😀 SMT Divergence should not be used as a standalone entry signal. A lower time frame setup is needed to confirm the trade.
• 😀 Higher time frame SMT analysis provides the direction and narrative, which can be used to frame trades on lower time frames.
• 😀 When trading bearish SMT, it's recommended to trade the weaker asset (the one with the lower high) rather than the stronger one.
• 😀 Internal SMT occurs when one asset pulls into a key level (e.g., fair value gap or order block) while the other stays above or below it, providing an opportunity for entry.
• 😀 SMT Divergence works across various asset classes, including Forex, crypto, and indices like NQ and ES.
• 😀 The key to successfully trading with SMT Divergence is aligning your trades with the broader market narrative and waiting for a proper setup before entering.

Q & A

What is SMT Divergence and how is it used in trading?

SMT Divergence (Smart Money Technique Divergence) is a method used to identify cracks in the correlation between two assets. It occurs when one asset makes a higher high or lower low while the other asset moves in the opposite direction. This divergence can be used to validate potential trade entries, particularly when it signals that a reversal might be imminent.

How do NQ and ES relate to each other in SMT Divergence?

NQ (NASDAQ) and ES (S&P 500) are correlated assets that typically move in the same direction. However, when SMT Divergence occurs, NQ might make a higher high or lower low while ES moves in the opposite direction. This divergence indicates a potential shift in market strength and can be used to validate bullish or bearish trades.

Can SMT Divergence be used as an entry signal by itself?

No, SMT Divergence by itself cannot be used as an entry signal. It serves as a tool for identifying the overall market direction or bias. To make a valid trade, traders need additional confirmation from lower time frames or other trading setups, such as fair value gaps or order blocks.

What is the significance of higher highs and lower lows in the context of SMT Divergence?

Higher highs and lower lows are key indicators in SMT Divergence. When an asset forms a higher high or lower low while the correlated asset moves in the opposite direction, it suggests a potential shift in the strength of the market. For example, a higher high in ES and a lower high in NQ may indicate a bearish bias.

How does one identify SMT Divergence on the charts?

SMT Divergence is identified by comparing the price action of two correlated assets. For instance, if NQ makes a higher high while ES makes a lower high, this is a divergence. This can be spotted at swing points where the price action deviates from the expected correlation between the two assets.

What is the role of lower time frames in SMT trading?

Lower time frames are crucial in SMT trading because they help identify specific entry points once the broader market direction has been validated by SMT Divergence. The higher time frame gives the overall market bias, but lower time frames provide the precise entry setup for trades.

Why should traders focus on the weaker asset in a bearish SMT scenario?

In a bearish SMT scenario, traders should focus on the weaker asset because it is more likely to fall. If NQ is weaker (making a lower high), it is the preferred asset to short, rather than the stronger one (ES in this case), which may show more resilience.

What is the importance of a stop loss when trading based on SMT Divergence?

A stop loss is essential in SMT Divergence trading because it protects the trader in case the market moves against the expected direction. The stop loss is typically placed at a swing high or low, where the trade setup would be invalidated if price crosses that point.

What is the difference between external and internal SMT?

External SMT occurs at the ends of a range, such as at a swing high or low. Internal SMT forms when one asset pulls into a key level, like an order block or fair value gap, while the other stays above or below it. Both types can be used to anticipate potential market reversals, but internal SMT offers more precise entries.

How can SMT Divergence be applied to different asset classes, like Forex or Crypto?

SMT Divergence works across various asset classes, including Forex, crypto, and indices. The concept remains the same: finding a discrepancy in the movement between two correlated assets. For example, EUR/USD can be correlated with GBP/USD, and Bitcoin with Ethereum, and SMT Divergence can help identify trade opportunities across these pairs.