Definition
"institutional market structure. It's the analysis of correlated assets with a relationship to inversely correlated assets" (0:40-0:50)
Identifying Institutional Market Structure in Forex
"we compare every price swing in the dollar index with the foreign currency that we trade" (1:24-1:28)
"every price swing should be studied to determine if market symmetry confirms it" (1:11-1:13)
Purpose & Context
"the purpose is to determine what the smart money is accumulating or distributing" (0:54-0:58)
"now currencies are the easiest to analyze with institutional market structure and we utilize the dollar index" (1:01-1:07)
SMT Divergence
What is SMT?
"us dollar index smt divergence now smt stands for smart money toll or smart money technique" (2:14-2:23)
"we're going to be looking for a divergence between closely correlated or inversely correlated assets" (2:25-2:29)
SMT Expectation Framework
"as the us dollar index trades higher we reasonably expect a lower price swing in foreign currency pairs" (1:32-1:37)
"if the us dollar index or a foreign currency pair fails to move symmetrically smart money is actively trading" (1:40-1:46)
"as u.s dollar index trades lower we reasonably expect a higher price swing in foreign currency pairs" (1:49-1:54)
"if the us dollar index or foreign currency fails to move symmetrically again smart money is actively trading" (1:57-2:01)
Symmetrical Market Conditions
Dollar Index Lower Low = Foreign Currency Higher High
"in a symmetrical market condition when the dollar index makes a lower low foreign currencies we expect that to make a higher high" (2:43-2:53)
What This Means
"when we see this this confirms current price action and the underlying trend is likely to continue" (2:55-2:59)
"now the idea of stalking reversal patterns in this condition is not highly probable in fact you want to avoid it all together" (3:00-3:08)
Dollar Index Higher High = Foreign Currency Lower Low
"now when the dollar index makes a higher high and the foreign currency makes a lower low this too confirms current price action and the underlying trend is likely to continue" (4:19-4:33)
"again like we just said about the other slide the idea of stalking reversal patterns in this condition is not high probability and it should be avoided" (4:34-4:44)
Non-Symmetrical Market Conditions
Dollar Index Lower Low + Foreign Currency Fails Higher High
"when the dollar index makes a lower low in the foreign currency fails to trade higher than a previous high this is us dollar index smt or usdx smt" (5:16-5:28)
"this does not confirm current price action and the underlying trend is likely not to continue however the idea of stalking reversal patterns in this condition is high probability and could reasonably be considered" (5:34-5:45)
Dollar Index Fails Higher High + Foreign Currency Lower Low
"when the dollar index fails to make a higher high while foreign currencies make a lower low" (6:18-6:26)
"the idea of stalking reversal patterns in this condition is high probability and could reasonably be considered" (7:07-7:11)
Market Psychology Behind Non-Symmetrical Conditions
"that lower low on foreign currencies is indicating that the dollar index is most likely going down below a previous low to do what wipe out the sell stops accumulate new buying and the rally should ensue in a dollar" (5:48-6:00)
"if the dollar is going to rally that means it's going to be downward pressure in foreign currencies and it's already shown itself in the form of weakness by having a failure swing in the foreign currency making a lower high" (6:00-6:11)
"this is showing the dollar index is failing to make a higher high that means there's underlying weakness" (6:32-6:40)
"and there's a lower low seen in foreign currency pairs they're going down below a previous low to accumulate all the sell stops on foreign currency pairs then they'll rally the market higher the dollar index will sell off which would support foreign currency long positions" (6:40-6:57)
Case Studies
Case Study 1: GBP/USD June 2016
"we're looking at a daily chart of the british pound usd or as we call it the cable and notice the highs in here okay we have a higher high formed in pound dollar this is around the end of april going into mid-june of 2016" (7:30-7:50)
"we have a higher high forming in the middle part of june 2016 by itself at the time when it was rallying up i'm sure it probably looked very positive and bullish to everyone but if that's the case if there is a symmetrical market condition that should be seen with what in terms of the dollar it should be seen with a lower low" (8:05-8:26)
"do we see a lower low form in the dollar index no that's it usdx smt bullish divergence" (8:30-8:38)
"that means what we're seeing underlying strength in the dollar index and even though this looks bullish on the british pound it's really just taking the buy stops above the 4760 level once those stops are ran out the market does in fact tank" (8:38-8:54)
"the underlying strength in the dollar index allows us to look at that 93 80 to 94 big figure this down candle in here that may become a future bullish order block that we could trade at once this void is closed in we know that there's underlying strength in the dollar index because there was an unwillingness to see that lower low form as we saw the higher high form and cable" (8:57-9:21)
"so we're gonna be cognizant of that but nonetheless we're looking for institutional market structure so this looks like by all indications when the market was rallying up retail traders and less informed traders would see that as a bullish breakout but it's not seen with the dollar index having a lower low" (9:46-10:02)
"the higher low formed on the dollar index that should have created a lower low as the cable made a higher high and it didn't what is that actually giving us it's giving us a great insight about what is being accumulated the dollar index is being accumulated on the long side otherwise it would have been permitted to go lower" (10:10-10:28)
Case Study 2: GBP/USD August 2016
"so now we're going to turn our attention to the latter portion of august 2016 to the first week of september and you can see that the cable made a higher high" (11:39-11:53)
"this low on the dollar index here did not see another lower low so as the cable was pressing higher rallying this dollar index should have seen a lower low it did not do that what that indicates is again dollar based strength in other words the dollar index is being accumulated on the long side" (12:15-12:42)
"the cable is being distributed now it's being distributed above an old high here but look to the left again above this old high here as well" (12:44-12:52)
"what type of stops reside above an old high buy stops why would they want to take the market to a buy stop because they want that buy stop to execute at the market to buy at the market they're going to sell their long positions they accumulated here and they accumulated here they can sell those longs at a higher price to willing buyers up here" (13:06-13:24)
"this is being distributed it's being distributed at an old high while the accumulation is seen in strength because the dollar can't go lower now think if the dollar doesn't go lower it's because it can't go lower because of pricing it's being kept while the premium is being built into the pound dollar" (13:26-13:47)
"so retail chases this run like this and false breakout while smart money looks at failure swings and the lows when you see what would otherwise look like strength and breakouts on the upside in foreign currencies always double check them with the dollar index if you don't see that then you know that the the false breakout on the upside in the foreign currency market it's all sucker play that's retail candy land" (13:49-14:10)
Practical Application
Long-Term Perspective
"when we look at identifying institutional market structure what we're basically doing is we're weighing the underlying strength of the buying and the selling at respective highs and lows in the dollar index versus foreign currencies now if you pick one particular currency pair and you identify areas like this expressing a daily chart it gives you a long-term perspective" (19:15-19:39)
Trading Framework
"where you can be focused primarily on being short that means if you are a short-term trader you could be looking to sell short at every 60-minute or 4-hour bare shorter block" (19:39-19:49)
"or you could be a day trader selling it above the opening price above the midnight candle in new york and you just capture all those types of moves going lower" (19:50-20:00)
Trading Context Benefit
"so it gives you an ideal context to work within and gives you a framework it doesn't give you ambiguity it gives you a very specific frame of mindset going in knowing that if this is a daily chart and we're seeing underlying strength in the dollar and we're seeing potential distribution in british pound usd most likely we're going to see lower prices on cable so that way we can be a buyer on dollar based currencies or a seller on foreign currencies that it's paired up with the dollar index" (20:02-20:30)
Study & Review
Click each card to reveal the answer (from transcript quotes)