Divergences are one of the most popular tools between traders. You can spot them between price and indicators (as most commonly done with RSI and MACD) or between two price charts (as I do between EURUSD and DXY).
To be premised that I’ve been introduced to this concept by whom I still consider my mentor: Michael Huddleston (aka ICT) so it’s nothing new I came up with. Mr Michael explains them for free in this YouTube video, so just to be clear I’m not leaking anything from his paid mentorship. Everyone can watch the video and study themselves. By the way: SMT stands for Smart Money Technique. Fancy name for divergence.
The way I use them is exclusively between DXY and EURUSD for a few reasons. First: I only trade EURUSD so I don’t really care about other pairs. Second: because EUR being the main component of the Dollar index basket hence the one with more meaningful significance.
The US Dollar is still the global currency in financial markets. And using it as a reference it’s key for technical analysis. In this explanation (from Wikipedia) you can dig about DXY, how it’s composed and its work purpose in detail.
As you can see EUR is the most weighted currency so for me it’s the only one who really makes a difference in terms of significance. There are only two types of divergences between EURUSD and DXY: bullish or bearish for the foreign currency. This is the way I learned…
BEARISH SMT x EURUSD
DXY makes LL while EU fails to make HH = EU is heavily sold = expect more downside.
BULLISH SMT x EURUSD
DXY makes LH while EU makes a LL = EU stop run = expect reversal.
In my examples both SMT have been spotted on M30. Usually I don’t consider them lower than M15 but that’s because I’m a day-trader and most of my entries are based on M5 & M1 price action. If you trade higher time frames I recommend spotting them on H1 or H4 at least.
Anyway, a really important note: I’d never use divergences as a trigger for a trade. If and only when I got the setup with all my rules in place and I see a SMT, then I consider it as an extra confluence to confirm my directional bias. I used to take trades blindly ‘cause divergences and it almost always ended up badly. Follow your trading plan first.
Many times when I share my SMT’ screenshots, people ask me how to get the chart like that. In this short video I’ll try to explain how to do it using TradingView and why I like it this way. Hope it helps.
