ICT Forex - The ICT Smart Money Technique or SMT

Introduction to ICT SMT Divergence

Overview of the Lesson

• The lesson focuses on teaching the ICT Smart Money Technique (SMT) divergence, specifically in bullish and bearish conditions.

• The primary concept revolves around the relationship between the dollar index and foreign currency pairs, particularly using the Aussie dollar as an example.

Understanding SMT Divergence

• SMT divergence is derived from studying relationships between correlated assets across various markets, including commodities and currencies.

• The speaker emphasizes that significant price movements can be identified through these correlations, which are crucial for traders.

Analyzing Price Movements

Significant Price Action

• A notable price movement in the Aussie dollar is highlighted, with over 150 pips indicating a significant change worth analyzing.

• The discussion includes a breakdown of specific lows in price action to illustrate how SMT divergence can signal bullish scenarios.

Diagram Explanation

• A diagram is introduced to represent the relationship between the Aussie dollar (blue line) and the dollar index (red line).

• In a symmetrical market, when the Aussie dollar makes a lower low, it is expected that the dollar index should make a higher high.

Identifying Correlations

Cracking Correlation Scenarios

• If the dollar index fails to make a higher high while the Aussie dollar makes a lower low, this indicates underlying weakness in the dollar.

• Conversely, if the dollar index makes a higher high but the Aussie fails to make a lower low, it suggests strength in buying pressure for the Aussie.

Timeframe Consistency

• Both scenarios discussed highlight that observing these relationships at identical timeframes can indicate potential turning points or accumulation phases for currencies like AUD.

Price Structure Analysis

Long-term Trends

• An analysis of long-term trends shows that since September 2017, there has been consistent bearish movement in AUD prices.

Identifying Key Levels

• A focus on specific price levels such as bullish order blocks will be essential for future tutorials.

Analyzing Price Action and Accumulation in Forex

Hourly Chart Insights

• The discussion begins with an analysis of the hourly price action, noting a dip below a weekly bullish order block, indicating potential accumulation.

• Two liquidity pools are identified: one 30 pips below the current level and another further down, both reaching into the daily and weekly bullish shoulder blocks.

• The speaker emphasizes using price action from the dollar index to assess whether there is genuine buying interest in the Aussie dollar or if it’s merely market noise.

Correlation Between Dollar Index and Aussie Dollar

• A method is suggested for comparing the dollar index's hourly chart alongside that of the Aussie dollar to identify trends.

• Observations reveal that while the Aussie dollar fails to make lower lows, the dollar index makes higher highs, suggesting accumulation in the Aussie dollar.

• This divergence indicates a graphic representation of real accumulation in the Aussie dollar against distribution in the dollar index.

Market Dynamics and Trade Opportunities

• The relationship between price movements is likened to a teeter-totter; as one asset moves down, another moves up. This suggests more buying pressure on the Aussie than on the dollar index despite its apparent strength.

• The speaker notes that this dynamic allows traders to look for optimal long entries in Australian dollars when signs of weakness appear in other currencies like cable (British pound).

Practical Trading Examples

• An example illustrates how to identify optimal trade entry points based on candle body analysis at key levels (e.g., 70.5 level).

• Further examples demonstrate how SMT divergence can provide insights into ongoing accumulation or distribution within price action.

Bearish Scenario Analysis

• A bearish scenario is presented where despite a lower low in the dollar index, cable fails to make a corresponding higher high, indicating underlying weakness.

Understanding Market Dynamics and Trade Entries

Identifying Weakness in Currency Pairs

• Tessa discusses the importance of identifying areas of liquidity for cable, particularly beneath old lows, which serve as potential targets for trades.

• An example of bearish SMT (Smart Money Technique) divergence is presented: when the dollar makes a lower low while a foreign currency fails to make a higher high, indicating weakness in that currency.

• The optimal trade entry for selling cable is highlighted, suggesting to enter at the highest body open or close down to a reactionary low with stops placed above recent highs.

Trading Strategies Based on Dollar Movements

• The discussion emphasizes how movements in the dollar can impact major currencies; specifically, if the dollar moves lower, traders should look for foreign currencies that fail to mirror this movement by making higher highs.