SMT Meaning: Spotting SMT Divergence in Bullish Markets

Discover SMT meaning, how SMT divergence works, and how to trade SMT divergence in a bullish market to maximize profits.

Buying and selling of assets can take place in different ways in the financial market. SMT meaning, Smart Money Trading or SMT divergence, is one such popular and effective way. In fact, SMT divergence in bullish market conditions is often used by traders to identify potential reversal or breakout zones based on the behavior of institutional players.

Price action traders generally use the SMT divergence concepts to identify potential opportunities and plan their trades. Wait, you haven’t used the SMT Trading strategy till now?

No need to worry. In the Beirman Capital blog, we will discuss SMT trading with a step-by-step process, benefits with risks, and considerations. So, let’s get started.

What is SMT in trading?

Smart Money Trading simply refers to following the footsteps of big and institutional market players. The strategy is widely used in forex, stocks, indices, crypto, and many other financial markets.

The entire concept of smart money is based on divergence. Divergence is when the asset price moves in the opposite direction and the indicators tell a different story.

A Smart Money divergence is a price action strategy to identify scenarios when the price of two correlated assets doesn’t follow each other. SMT traders basically use the divergence to identify and take advantage of market inefficiencies and imbalances. It helps them in determining what the institutional traders are doing in the market.

SMT Divergence Trading Example

Suppose two stocks, A and B are highly positively correlated. On the minute chart, stock A breaks the support level and makes the lower lows while B stays above stock.

As the stocks are positively correlated, they should move in the same direction; however, they are not, and the scenario is called divergence.

In this case, A’s support breakout can be a fakeout. A smart money trader can either wait for confirmations or place a long position in Stock B.

Types of SMT Divergence

Bullish SMT Divergence:

SMT divergence in a bullish market is when one asset forms a lower low and the correlated asset does not.

Despite the weakness in one asset, the strength in the other signals the possibility of bullishness. Generally, traders consider opening a buy position in such cases.

Bearish SMT Divergence:

SMT divergence in a bearish market is when one asset forms a higher high and the correlated asset does not.

Despite the strength in one asset, the weakness in the other signals the possibility of a bearish market. Generally, traders consider opening a sell position expecting a price downfall or reversal.

How to Use SMT Divergence Trading Strategy

Confused? Here is a step-by-step guide on how to practice the SMT Divergence trading strategy

Understand the Market Correlations:

The entire concept of SMT divergence is based on market correlations. A correlation in which two assets have a strong relationship.

A positive correlation is when the prices of two assets tend to move in the same direction. Basically, the two asset prices will either rise or fall.

Negative Correlation is when the price of two assets tends to move in the opposite direction. Basically, when one asset price rises and one falls.

Thus, the first step is to study the market correlation concepts and identify the assets that have either positive or negative correlations.

Determine your Assets:

You have understood the correlations, so now you have to choose the correlated asset you want to trade in. You can identify these correlations in forex, stock, commodity indices, and other financial markets.

EUR/USD and GBP/USD, JP Morgan and Bank of America, ExxonMobil and Chevron, Gold and Silver, Bitcoin and Ethereum are some popular positively correlated assets.

While the Gold and US Dollars, USD/JPY and XAU/USD, DXY and EUR/USD, are some popular negative correlation assets. You can select the SMT trading assets based on your capital, risk, and interest.

Select Divergence Tool:

Now, to spot divergence on asset price, you need to use some price action or technical analysis tools. Firstly, select a reputable charting platform to analyse and interpret asset charts.

Secondly, plot indicators such as Moving averages divergence, Relative Strength Index, and Correlation Coefficient indicator on the chart. You can also look for bullish or bearish divergence chart patterns to spot divergence.

Confirm Divergence:

Identifying SMT divergence is not enough; confirmations are a must for placing trades. Traders can use technical analysis indicators or candlestick chart patterns for confirmation purposes.

Place Trades:

Once you have identified and confirmed the divergence, you can go ahead with placing trades. Enter a buy position in case of bullish divergence and a sell position in case of bearish divergence. Watch the overall market conditions to make changes in your trades accordingly.

Advantages of the SMT Trading Strategy

Versatility: The scope of SMT trading is not limited to a particular market. You can trade forex, stocks, indices, cryptocurrencies, and other financial assets. Mastering these strategies will allow you to trade in diverse assets.

Simplicity: SMT trading is quite a simple strategy. If you have price action and technical analysis concepts, then practicing this style is quite easy.

Effective Decision Making: SMT divergence is based on the institutional and big players’ market moves. These participants have the power to shake the entire market. Thus, watching them for placing trade enhances your decision-making.

Disadvantages of the SMT Trading Strategy

Ignores Broader Market Perspective: SMT trading is entirely based on the technical analysis concept. However, the financial market is driven by fundamental and economic events. Thus, making decisions solely based on SMT divergence is not the right idea.

False Signals: SMT is not a foolproof strategy; the divergence may give false signals sometimes. And if you place a trade based on these signals, then you may lose a significant amount of money.

Wrapping Up

SMT Divergence is surely a must-try strategy with a high success rate and low-risk management. However, proper practice is necessary before trading in the financial market.

Every strategy has pros and cons, even the SMT has some benefits and drawbacks. However right approach helps you deal with the negative sides.

Want to Practice SMT Divergence Trading

Open an account with Beirman Capital and try and test diverse strategies on our platform.

FAQs

1. The highest time frame to trade smt divergences?

The daily (D1) or 4-hour (H4) chart is normally the highest time frame to trade SMT (Smart Money Technique) divergences. These provide more powerful, more dependable indications of long-term trades.

2. What do the slopes mean in smt divergences?

SMT divergences indicate the direction of price movement using slopes. When one market is rising and the other is flat or falling, it indicates divergence, which is a potential reversal or powerful move.

3. SMT divergence in a bullish market?

When the primary price continues to increase and a correlated market or indicator begins to decrease or slow down, SMT divergence occurs in a bullish market. This may be an indication of a future change of trend or drawback.

4. What is SMT in trading?

SMT trading refers to Smart Money Technique. It is a method of identifying when large investors (smart money) are entering or leaving the market by comparing the price behaviour of related markets to forecast price movement.