ICT SMT Divergence occurs when two related and correlated assets show opposite trends [one bullish and the other bearish] on their price charts during the same timeframe.
This situation can occur in positively correlated assets such as EUR/USD versus GBP/USD. For example, EUR/USD forms a Higher High (HH), while the other asset forms a Lower High (LH) instead of a Higher High (HH.)
In negatively correlated assets, like EUR/USD versus the US Dollar Index (USDX), EUR/USD forms a Higher Low (HL); while the other asset forms a Lower High (LH) instead of a Higher High (HH).
What is ICT SMT Divergence?
Typically, correlated assets in financial markets move symmetrically. If two positively correlated assets exist and one forms a Higher High (HH), the other will also form a Higher High (HH).
For instance, the price charts of two positively correlated assets, EUR/USD versus GBP/USD, show this phenomenon over the same timeframe.
ICT SMT Divergence, or the Smart Money Technique (SMT), highlights a market scenario where two correlated assets show opposing structures within the same timeframe (one bullish and the other is bearish.)
Sometimes, correlated assets decouple. For example, if one forms a Higher High (HH), while the second fails to form a Higher High (HH), and vice versa, this situation is known as ICT SMT Divergence.
How to Use ICT SMT Divergence?
ICT SMT Divergence acts as a potential reversal signal for correlated assets.
When two positively correlated assets are trending upward, but one forms a Higher High (HH), while the other fails to do so, it signals a potential trap for traders.
This divergence indicatesmarket weakness and suggests a possible reversal for these assets.
ICT SMT Divergence can be used between two correlated assets as a trading strategy. When their price charts interact with the Premium/Discount Array (PD Array) on a higher timeframe, it provides confirmation to enter a trade.
Positive and Negative Correlations in ICT SMT
There are two main types of divergence: Positive and Negative.
Positive Correlation
A positive correlation occurs when two assets generally move in the same direction.
In forex markets, EUR/USD and GBP/USD pairs often move together. Similarly, ES (S&P 500) and Nasdaq (NQ 100) display symmetrical movements in indices.
Bitcoin (BTC) and Ethereum (ETH) are examples of assets reflecting symmetrical correlation in the crypto market.
Negative Correlation
A negativecorrelation occurs when two assets move in opposite directions.
For example, the US Dollar Index (DXY) and EUR/USD pairs often exhibit inverse correlation in the forex market.
Bitcoin (BTC) and the US Dollar Index (USDXY)correlate negatively in the crypto market.
Types of ICT SMT Divergence
ICT SMT Divergence can be categorized based on market direction:
Bullish SMT Divergence
Bullish SMT Divergence in positively correlated assets occurs when both are trending downward, but one forms a Lower Low (LL) while the other forms a Higher Low (HL).
In negatively correlated assets, Bullish SMT Divergence happens when one asset creates a Lower High (LH), while the other forms a Lower Low (LL) instead of a Higher Low (HL).
A specific asset that forms a Lower Low (LL) instead of a Higher Low (HL) is considered manipulated, and the SMT divergence in it indicates a bullish reversal.
Bearish SMT Divergence
Bearish SMT Divergence occurs in positively correlated assets when both are trending upward. It happens when one asset forms a Higher High (HH), while the other forms a Lower High (LH.)
For negatively correlated assets, Bearish SMT Divergence happens when one asset forms a Higher Low (HL); while the other forms a Lower High (LH) instead of a Higher High (HH).
Therefore, an asset that forms a Lower High (LH) instead of a Higher High (HH) is considered manipulated, and the SMT divergence in it indicates a bearish reversal.
ICT SMT Divergence Indicator
TFLAB team designed the ICT SMT Divergence Indicator based on ICT and Smart Money techniques.
Thisindicator compares the charts of three different but related assets, graphically displaying bullish and bearish divergenceson price charts.
- ICT SMT Divergence Indicator for MetaTrader 4
- ICT SMT Divergence Indicator for MetaTrader 5
- ICT SMT Divergence Indicator for TradingView
Optimal Timeframe for Identifying ICT SMT Divergence
As an entry technique, the best timeframe to monitor ICT SMT Divergence is 15 minutes or less.
Monitoring it on highertimeframes might result in delayed formations and missed opportunities.
Conclusion
Typically, correlated assets in financial markets move symmetrically. ICT SMT Divergence helps traders identify key reversal points by comparing the charts of two correlated assets.
Initially, ICT introduced SMT Divergence for NQ (Nasdaq 100) and ES-Mini (S&P 500.) Over time, the applicability of SMT Divergence in other markets has been demonstrated.
The reliability of SMT Divergence increases with a stronger correlation between assets.
