The ICT Smart Money Technique (SMT): Simply Explained, Powerful Results

Summary

In this video, traders learn how to leverage the Smart Money Technique (SMT), a powerful tool to identify potential price reversals by analyzing divergences between correlated and inversely correlated currency pairs or indices. SMT helps traders spot cracks in market correlation, indicating institutional accumulation or distribution, and can significantly increase win rates. The video covers both basic and advanced concepts of SMT, including real-world examples and practical strategies to execute trades. By using SMT in conjunction with higher timeframe analysis, traders can better filter trade opportunities and predict market direction, ultimately improving trading outcomes.

Takeaways

• 😀 SMT (Smart Money Technique) is a powerful tool used to spot price reversals by identifying divergences between correlated or inversely correlated pairs.
• 😀 SMT helps traders assess the strength of price movements and predict reversals before they happen, increasing the probability of successful trades.
• 😀 Correlated pairs move in tandem, and a divergence between them signals a potential price reversal, such as one pair forming a lower low while the other forms a higher low.
• 😀 Inversely correlated pairs move in opposite directions, and SMT divergences here also signal a likely price reversal, such as one pair making lower lows while the other forms higher highs.
• 😀 A valid SMT divergence often occurs when the price action of one pair deviates from the expected pattern of the other correlated pair, indicating a potential reversal in market direction.
• 😀 To improve the reliability of SMT signals, traders should confirm the divergence aligns with the broader market profile (bullish or bearish) and higher timeframe levels (support/resistance).
• 😀 For higher probability trades, SMT divergences should be sought in conjunction with key market levels (such as PD arrays or liquidity levels).
• 😀 Traders should be cautious about SMTs and ensure they meet the necessary conditions before executing trades to avoid false signals.
• 😀 Key forex pairs to monitor for SMT divergence include the USD Index, EUR/USD, and GBP/USD. For indices, look at the S&P, NASDAQ, and Dow Jones, and for cryptocurrencies, monitor Bitcoin and Ethereum.
• 😀 After spotting an SMT divergence, traders should wait for a market structure shift before entering a trade, ensuring a more reliable entry point and higher risk-to-reward ratio.

Q & A

What is SMT (Smart Money Technique)?

SMT, or Smart Money Technique, is a trading confirmation tool that helps traders predict price reversals by identifying divergences between correlated or inversely correlated pairs and indices. It is used to assess market strength and spot potential reversal points before they happen.

How does SMT work in correlated pairs?

In correlated pairs, such as EUR/USD and GBP/USD, the price action of both pairs should generally follow the same trend. However, when one pair shows a divergence (e.g., one pair makes a lower low, and the other forms a higher low), it indicates a potential reversal and signals a valid SMT.

What is an example of a bearish SMT divergence?

A bearish SMT divergence occurs when one pair makes a higher high and takes out buy-side liquidity, while the other correlated pair forms a lower high without sweeping the buy-side liquidity. This suggests the second pair is under distribution pressure, signaling a potential downside move.

What is the significance of inversely correlated pairs in SMT?

Inversely correlated pairs, such as EUR/USD and the Dollar Index, typically move in opposite directions. SMT helps identify divergences between them, signaling potential price reversals. For example, if EUR/USD forms a lower low but the Dollar Index fails to make a higher high, it indicates a weak EUR/USD and suggests an upcoming reversal.

How can traders filter out unreliable SMT signals?

To filter out unreliable SMT signals, traders should look for a higher timeframe market profile and ensure that price taps into a higher timeframe PD array (price delivery zone). A valid SMT is more reliable when the price shows divergence after interacting with a key support or resistance level.

What pairs and assets should traders focus on when looking for SMT divergence?

Traders can focus on pairs like the EUR/USD, GBP/USD, and USD/JPY in forex, indices like the S&P 500, NASDAQ, and Dow Jones, and cryptocurrencies such as Bitcoin and Ethereum. These assets are highly correlated or inversely correlated, making them ideal for spotting SMT divergence.

Why is the Dollar Index important when trading SMT divergence?

The Dollar Index is inversely correlated with pairs like EUR/USD and GBP/USD. When the Dollar Index trends higher, EUR/USD and GBP/USD tend to trend lower. SMT divergence between these pairs, such as EUR/USD failing to make a lower low while the Dollar Index rises, signals a potential reversal.

How can traders use SMT to predict price direction in cryptocurrency markets?

In cryptocurrency markets, traders can use SMT by comparing price action between Bitcoin and Ethereum. If Bitcoin fails to follow the same trend as Ethereum, forming a higher low while Ethereum makes a lower low, it suggests Bitcoin is in an accumulation phase and hints at a bullish movement for both assets.

What is the process of executing a trade using SMT divergence?

To execute a trade using SMT divergence, first, identify a divergence between correlated pairs or assets. Then, check for alignment with higher timeframe market structure and key support or resistance levels. Once SMT divergence is confirmed, wait for a market structure shift before entering a trade, either at a fair value gap or order block.

Can you explain the concept of a 'market structure shift' and how it relates to SMT?

A market structure shift occurs when the market changes direction, such as from a series of lower lows and lower highs to higher highs and higher lows (or vice versa). In SMT, this shift is crucial because it provides confirmation that the reversal suggested by the divergence is underway, offering a clear entry point for traders.