SMT divergence
Two related instruments came apart: one made a new high, the other did not. One of them is lying.
SMT divergence — what it is?
SMT divergence is a disagreement in the behaviour of related instruments. One made a new extreme, the other did not, although they usually move together.
It differs from ordinary divergence in that two markets are compared, not price against an indicator. That makes the signal independent of settings and formulas.
A clear example: bitcoin makes a new low, ethereum does not. So the push down is not coming from the general flow but from one spot, and it is most likely a liquidity sweep.
SMT divergence — how it is built?
You take two instruments with a stable correlation: BTC and ETH, EUR/USD and the dollar index, gold and the dollar. You compare simultaneous extremes on one timeframe. A divergence is a reason to look for a reversal; confirmation still comes from structure.
SMT divergence — common mistakes
Comparing instruments without a stable correlation.
Looking at extremes that are spread apart in time.
Entering on SMT without confirmation from a break in structure.
Forgetting that correlations change: what is linked this quarter can come apart the next.
Related to
Glossary
- instrument
- the specific thing being traded: EUR/USD, XAU/USD, BTC/USDT.
- divergence
- price and the indicator pointing in different directions.
- indicator
- a calculation based on price or volume, drawn on the chart.
- Bitcoin
- the first and largest cryptocurrency by capitalisation.
- low
- the lowest price of the period.
- Ethereum
- the second by capitalisation, a platform for smart contracts.