ICT SMT Divergence PDF Guide: Types and Trading Uses

Welcome to a straightforward guide on ICT SMT Divergence, a concept that might seem complex at first glance but is quite approachable with the right explanation. As someone who’s spent years navigating the markets, I’m here to break it down in simple terms that both new and seasoned traders can appreciate.

What Is ICT SMT Divergence?

ICT SMT Divergence, short for Inner Circle Trader’s Smart Money Technique Divergence, refers to a situation where two assets that usually move together start showing different patterns. Imagine watching two currency pairs like GBP/USD and EUR/USD. Normally, if one goes up, the other does too. But sometimes, one might rise while the other doesn’t follow suit. This mismatch is called divergence and can signal a potential shift in market direction.

Positive and Negative Correlation

Understanding correlation is key to grasping ICT SMT Divergence. Correlation is about how two assets move in relation to each other.

A positive correlation means that two assets generally move in the same direction. In forex, pairs like GBP/USD and EUR/USD often rise and fall together. In the stock market, indices like the S&P 500 and the Nasdaq 100 usually trend similarly. In cryptocurrencies, Bitcoin and Ethereum often move in sync.

A negative correlation means that two assets move in opposite directions. For example, the US Dollar Index (DXY) and the EUR/USD pair typically have an inverse relationship. When the US dollar strengthens, EUR/USD tends to weaken, and vice versa.

Types of ICT SMT Divergence

There are two main types of ICT SMT Divergence: bullish and bearish.

Bullish SMT Divergence occurs when the market hints at a potential upward reversal. In positively correlated assets, this happens when both are trending down, but one makes a lower low while the other makes a higher low. The asset making the higher low shows relative strength, suggesting that the downward move might be losing steam.

In negatively correlated assets, bullish divergence appears when one asset makes a lower high while the other makes a lower low instead of a higher low. This indicates that the asset making the lower low might be overstating the bearish sentiment, pointing toward a possible rise.

Bearish SMT Divergence signals a potential downward reversal. For positively correlated assets, it happens when both are trending up, but one makes a higher high while the other makes a lower high. The asset making the lower high shows weakness, hinting that the upward momentum might be fading.

In negatively correlated assets, bearish divergence is seen when one asset makes a higher low while the other makes a lower high instead of a higher high. This suggests that the asset failing to make a higher high may be leading the market toward a downturn.

Using ICT SMT Divergence in Trading

ICT SMT Divergence can be a valuable tool for identifying key turning points in the market. Here’s how you might incorporate it into your trading strategy:

1. Select Correlated Assets: Choose two assets that are known to move together or inversely, depending on positive or negative correlation.
2. Monitor Their Movements: Observe these assets on the same timeframe, preferably on charts like the 15-minute timeframe or lower. Look for instances where their usual movement patterns diverge.
3. Identify Divergence: Notice when one asset makes a significant move (like a higher high or lower low) that the other doesn’t replicate.
4. Confirm with Other Analysis: Use additional tools like support and resistance levels, trend lines, or other indicators to confirm the potential reversal suggested by the divergence.
5. Plan Your Trade: Based on your analysis, determine your entry and exit points. Ensure that the divergence aligns with the overall market context and your trading plan.
6. Risk Management: Always apply proper risk management techniques. Set stop-loss orders and consider the appropriate position size to protect your capital.

Best Timeframes and Pairs for ICT SMT Divergence

ICT SMT Divergence is most effective on lower timeframes, such as the 15-minute chart or even shorter intervals. This is because divergences can develop and resolve quickly, and you want to be able to act promptly.

As for the best pairs or markets to apply this technique, consider assets with strong correlations. In forex, pairs like GBP/USD and EUR/USD (positive correlation), or EUR/USD and DXY (negative correlation), are good examples. For indices, the S&P 500 and the Nasdaq 100 often move together. In the world of metals, gold and silver typically show similar trends. In cryptocurrencies, Bitcoin and Ethereum are commonly correlated.

The stronger the correlation between the assets, the more reliable the divergence signals tend to be.

Why Is ICT SMT Divergence Useful?

This technique can give you insights into the market’s underlying strength or weakness that might not be apparent when looking at a single asset. When two correlated assets start diverging, it could indicate that significant players in the market are shifting their positions, which might lead to a reversal.

Final Thoughts

ICT SMT Divergence is a handy tool to add to your trading arsenal. By keeping an eye on the relationships between correlated assets, you can spot potential market reversals early. Remember, no single indicator or method is foolproof. It’s important to use ICT SMT Divergence in conjunction with other analysis techniques and to always practice sound risk management.

Frequently Asked Questions