The dollar index is just one example of a correlated asset. You can find interesting correlations in indexes as well. For instance, you can study the correlation among the three major indexes S&P500, NASDAQ, and Dow Jones.
However, for the sake of this study, we will stick to what is widely popular and easy to understand, which is looking at the correlation of DXY vs EURUSD.
With SMT forex divergence, you simply match the highs and lows of a particular pair (e.g. EURUSD) against an index (e.g. DXY) or other instruments.
Generally, in normal market conditions, when DXY makes a higher high, EURUSD would make a lower low.
However, when these assets do not respect their inherent correlation, we can assume ‘smart money manipulation.’
When looking at bullish or bearish SMT forex divergence, it will depend on which trading asset we are looking at. For example, if we look at DXY vs EURUSD, as they are negatively correlated assets, a bullish divergence occurs on DXY., or a bearish divergence on EURUSD.
So, let’s dive into what makes a bullish or bearish SMT divergence on DXY vs EURUSD.
