Smart Money Technique (SMT) Divergences - The Ultimate GuideIntroduction
SMT Divergences are a powerful concept used by professional traders to spot inefficiencies in the market. By comparing correlated assets, traders can identify hidden opportunities where one market shows strength while the other shows weakness. This guide will break down the major SMT divergences: EURUSD/GBPUSD, US100/US500, and XAUUSD/XAGUSD .
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What is SMT Divergence?
SMT Divergence occurs when two correlated assets do not move in sync, signaling potential liquidity grabs or market inefficiencies. These divergences can be used to confirm trend reversals, identify smart money movements, and improve trade precision.
Key Concepts:
- If one asset makes a higher high while the correlated asset fails to do so, this suggests potential weakness in the pair making the higher high.
- If one asset makes a lower low while the correlated asset does not, this suggests potential strength in the pair that did not make a lower low.
- Smart Money often exploits these inefficiencies to engineer liquidity hunts before moving price in the intended direction.
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EURUSD vs. GBPUSD SMT Divergence
These two forex pairs are highly correlated because both share the USD as the quote currency. However, when divergence occurs, it often signals liquidity manipulations.
How to Use:
- If GBPUSD makes a higher high but EURUSD does not, GBPUSD may be trapping breakout traders before reversing.
- If EURUSD makes a lower low but GBPUSD does not, EURUSD might be in a liquidity grab, signaling a potential reversal.
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US100 vs. US500 SMT Divergence
The NASDAQ (US100) and S&P 500 (US500) are both major indices with a strong correlation, but tech-heavy NASDAQ can sometimes lead or lag the S&P.
How to Use:
- If US100 makes a higher high but US500 does not, it suggests US100 is extended and may reverse soon.
- If US500 makes a lower low but US100 does not, US500 might be experiencing a liquidity grab before a reversal.
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XAUUSD vs. XAGUSD SMT Divergence
Gold (XAUUSD) and Silver (XAGUSD) have a historic correlation. However, due to differences in volatility and liquidity, they can diverge, presenting trading opportunities.
How to Use:
- If Gold makes a higher high but Silver does not, Gold might be overextended and ready to reverse.
- If Silver makes a lower low but Gold does not, Silver might be in a liquidity grab, signaling strength.
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Indicator Used for SMT Divergences
To simplify the process of identifying SMT divergences, this guide utilizes the TradingView indicator TehThomas ICT SMT Divergences . This tool automatically detects divergences between correlated assets, highlighting potential trade opportunities.
You can access the indicator here:
Why Use This Indicator?
- Automatically plots divergences, saving time on manual comparisons.
- Works across multiple asset classes (Forex, Indices, Metals, etc.).
- Helps traders spot Smart Money inefficiencies with ease.
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Final Tips for Trading SMT Divergences
1. Use Higher Timeframes for Confirmation: SMT Divergences on 1H or 4H hold more weight than those on lower timeframes.
2. Combine with Other Confluences: ICT concepts like Order Blocks, FVGs, or liquidity sweeps can strengthen the SMT setup.
3. Wait for Market Structure Confirmation: After spotting SMT divergence, look for a market structure shift before entering trades.
4. Be Mindful of Economic Events: Divergences can appear due to news releases, so always check the economic calendar.
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Conclusion
SMT Divergences are a valuable tool for traders looking to gain an edge in the markets. By analyzing inefficiencies between correlated assets, traders can anticipate smart money movements and improve trade precision. Practice spotting these divergences on real charts, and soon, you'll develop a keen eye for hidden liquidity traps.
Happy trading!
