SMT Divergences
Identification Rules
Learn to spot when price makes new highs/lows but momentum indicators don't confirm.
- Identify two positively correlated assets (e.g., ES and YM futures)
- For bullish SMT: One asset makes a lower low while the correlated asset makes a higher low
- For bearish SMT: One asset makes a higher high while the correlated asset makes a lower high
- Bullish SMT divergences form at market lows
- Bearish SMT divergences form at market highs
Entry Rules
Timing your trades when divergence signals potential reversal points.
- Wait for price to reach a key technical level after SMT divergence forms
- Combine with other price action concepts like Fair Value Gaps or Order Blocks
- Enter long when price retraces to bullish confluence zone after bullish SMT
- Enter short when price retraces to bearish confluence zone after bearish SMT
Stop Rules
Protect your capital with proper stop placement beyond key swing points.
- Place stop loss below the confluence zone for long trades
- Place stop loss above the confluence zone for short trades
Target Rules
Set realistic profit targets using support/resistance and measured moves.
- Target 1:3 risk-to-reward ratio as standard
- Adjust targets based on broader market structure
Confluence Factors
Additional signals that strengthen divergence setups and boost win rates.
- Fair Value Gaps at divergence levels
- Order Blocks near divergence points
- Key support/resistance levels
- Multiple timeframe alignment
Failure Modes
Common scenarios where divergences fail to produce expected reversals.
- False divergence
- Weak correlation
- Standalone trading
Common Mistakes
Typical errors traders make with divergences and how to avoid them.
- Trading SMT divergences as standalone signals
- Using assets that aren't truly correlated
- Ignoring broader market structure