How to understand that Smart Money has entered the forex
Today we are going to talk about one of the most important and professional forex market techniques used by big banks and professional traders. Using this technique, we can find out when the smart money is entering the market. As you know, big banks and financial institutions need a lot of liquidity to create trends on the chart, and in order to collect this liquidity, they need to activate the stop-losses of many traders. By using smart money, they activate the stop-losses and collect market liquidity, or in other words, they perform stop-hunting.
How does smart money enter the market and how does it work?
At this point, banks enter a large amount of money into a currency pair for a short period of time. Then they activate stop losses and after that they move the market in their desired direction.
When smart money enters the market, a divergence occurs on the chart, but this divergence cannot be detected by indicators And many of the traders are stop hunted and exit the trend. We use correlation to detect this divergence so that we can know when smart money is entering the market.
The photo by Trading View
In the image above we have added the USDJPY currency pair and the DXY index to our chart because the USDJPY currency pair has a very high correlation with the DXY index. To see the divergence, we need to select 2 currency pairs that have a high correlation, add them to our chart and compare their prices and trends.
In the picture above, since our currencies are highly correlated, if the price of the DXY index goes up and rises, the price of USDJPY should also go up, or if the price of the dollar index goes down, the price of USDJPY should also go down on the chart.
In the photo above, the price of USDJPY has been rising and making higher lows, but the DXY index has not been making higher lows and its price has been falling and making lower lows. At this point, the smart money has entered the market and a smart money divergence has occurred. Since the market is sideways in this area, we can wait for sharp price movements and get ready to trade.
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