SMT Divergence Strategy Explained

Good morning. This is David from Trader Dale, and this is the trade example of the week. Today we are going to look at a trade example on a currency pair in the London session. When we trade currencies, we typically like to trade and analyze correlated pairs together. So EUR/AUD and GBP/AUD are correlated pairs, meaning they will move in unison with each other. The reason we look at that is because we look for cracks in correlations. ICT may call it an SMT—it’s a divergence. You can see it right here, where in the London session GBP/AUD takes out the low of the previous day’s session, while EUR/AUD does not. That creates a divergence.

Along with that divergence, we look for a similar pattern. We look for an accumulation, a manipulation with displacement, and then an immediate disrespect of that displacement to go into distribution. Accumulation, manipulation, distribution. We look to trade the inverse of the fair value gap that displaced into that level, creating the SMT and grabbing internal liquidity.

Now, when we have two pairs like this and we have the divergence, there is obviously a trade opportunity in both. But which one do we trade? Very simple answer. If it’s a long trade, we are going to trade the stronger pair. The stronger pair is the one that did not make the low. The weaker pair is the one that did make the low. So focusing on GBP/AUD this morning, we have a grab of internal liquidity at these levels right here. We have an accumulation setup, a manipulation, a displacement, which means a fair value gap into that level, creating that low and forming the SMT with the correlated pair, in this case EUR/AUD.

To validate the trade, we need this fair value gap to be disrespected, creating an inverse fair value gap. Once that happens, it validates the SMT. It validates that this is going to reverse, and it also confirms the distribution part of the accumulation–manipulation–distribution setup, in which case we want to trade the distribution.

This trade would look very simple. When price closes above the inverse fair value gap, you can either take it right on the close or wait for a little bit of a pullback. Let’s say you waited for a pullback. The stops on this trade would go just below that inverse fair value gap. Then we target liquidity levels that we anticipate to be valid, which here would be the Asian highs.

This was a 3:1 risk-to-reward trade. It basically had three ingredients: tapping into a higher time frame fair value gap, creating an SMT divergence with a correlated pair, and having an accumulation–manipulation–distribution setup on a shorter time frame into that level. This includes accumulation, manipulation with displacement creating a fair value gap, and then an immediate disrespect of that fair value gap to the upside.

This leads to the conclusion that this move was just a manipulation. Once we identify that, we can target the reversal and the distribution move up into a liquidity area, which we believe would be the Asian highs.

This is a 3:1 risk-to-reward trade. Another way this can be traded is to keep things simple. If you are confused about where the draw or target is, just set a 2:1 risk-to-reward and take it. If you are right half the time with a 2:1 risk-to-reward, you will make a lot of money. Think about where you will be if you are right 70–75% of the time, which is very achievable with a strategy like this if done properly.

Hey everyone, it’s Dale here. I hope you enjoyed the video. If you’d like to trade alongside me and our team of prop firm funded traders every day, then click the link below the video and hop aboard. We’re looking forward to trading with you.