25-ICT Mentorship Core Content - Month 4 - Interest Rate Effects On Currency Trades

Last modified by Drunk Monkey on 2022-09-09 12:49
1 00:00:24,810 --> 00:00:37,140 ICT: Next on currency trades. Okay, now in this module we're gonna talk about Smart Money accumulation and distribution, fundamentally speaking. And that
2 00:00:37,140 --> 00:00:46,020 comes by way of our understanding and hopefully your acceptance to the fact that interest rates are the single most influential driving force behind market
3 00:00:46,020 --> 00:00:59,940 moves. Understanding interest rate shifts and changes can assist you in selecting trades. Technical analysis and key interest rates can unlock
4 00:00:59,940 --> 00:01:12,960 professional money management movement. Technical analysis of key interest rates can unlock professional money movement. Interest rate triads provide a visual
5 00:01:12,960 --> 00:01:26,610 depiction of Smart Money accumulation and distribution. Alright, so what are interest rate triads? Well, you have to start with a 30 year bond, which is the
6 00:01:26,610 --> 00:01:39,750 key long term interest rate benchmark the 10 year note which has an intermediate term interest rate. And the five year note, which is a short term interest rate.
7 00:01:40,320 --> 00:01:50,910 Now these three interest rate markets are all futures markets. Okay, they're traded on the futures market exchanges. And by looking at the price action of
8 00:01:50,910 --> 00:01:59,700 these three in relationship to one another, it will unlock a lot of the things that most of the time eat ag when you're looking for price action type setups.
9 00:02:02,130 --> 00:02:14,400 But overlaying or comparative analysis on these three interest rates, unlocks price action. Failure swings at opportunistic times can validate institutional
10 00:02:14,400 --> 00:02:25,140 order flow. Now, what do I mean by that? Well, in the very first teaching, of this mentorship, the whole content delivery of September 2016, I gave you
11 00:02:25,140 --> 00:02:37,500 specific things to focus on. Those things that we talked about in September, are going to be amplified and be able to highlight much more probable trade
12 00:02:37,500 --> 00:02:48,960 scenarios after going through this particular module. Okay, so what does Smart Money look like in price? What's it look like? How do you know when smart money
13 00:02:48,960 --> 00:02:59,670 is moving in, in the marketplace? Well, first, let's take a look at what it looks like in bearish conditions. Obviously, there has to be some diametrically
14 00:02:59,670 --> 00:03:12,570 opposed view. And yet to start by looking at a base asset or benchmark, and in bearish conditions, that base asset or benchmark would be making higher highs.
15 00:03:13,050 --> 00:03:23,340 Now, the base asset or benchmark could be the Dow Jones Industrial and for trading stocks. It could be the dollar index. If we're trading currencies, it
16 00:03:23,340 --> 00:03:37,050 could be the CRB Index if we're trading commodities. The smart money distribution can be seen by comparable assets that are closely correlated that
17 00:03:37,050 --> 00:03:48,240 are making lower highs. The reason why this is occurring, is because the smart money's heavily distributing while the base asset or benchmark is moving higher.
18 00:03:50,190 --> 00:04:00,360 The public or less informed traders will be looking at the market making higher highs for instance on like the Dow Jones Industrial, they will attribute that as
19 00:04:00,630 --> 00:04:10,920 this is underlying strength, so therefore, the market should keep going higher. But if the general market averages start making lower highs, that's actually
20 00:04:10,920 --> 00:04:23,190 indicating their Smart Money distribution under way and it's not new buying it's sending the price higher, but heavy distribution. In bullish conditions, the
21 00:04:23,190 --> 00:04:36,180 opposite is seen yet to have obviously a base asset or benchmark to compare and assume that the base asset or benchmark is moving lower. And it's gonna be
22 00:04:36,180 --> 00:04:37,710 forming lower lows.
23 00:04:40,170 --> 00:04:49,080 And smart money accumulation will be seen with that condition being met with higher lows. And again, using the analogy that we just used a minute ago,
24 00:04:49,110 --> 00:04:58,080 assuming that the base asset or benchmark is the Dow Jones Industrial, it could be making lower lows and by all standards looking at it, the public or less
25 00:04:58,080 --> 00:05:08,130 informed traders would attribute that As underlying weakness of therefore stocks should be continually going lower. But a closer look, we'll see that some stocks
26 00:05:08,130 --> 00:05:18,630 are not making lower lows. And that is showing a graphic depiction or visual representation of Smart Money accumulation, because those stocks will making
27 00:05:18,630 --> 00:05:29,610 higher lows. And the reason why this is occurring is because if they're heavily buying, the price will not be permitted to go lower, because that is the basis
28 00:05:29,610 --> 00:05:38,880 of supply and demand. If there's a high demand for something, it doesn't go on discount, it goes at a steady or higher price and many times at a higher price.
29 00:05:39,240 --> 00:05:49,320 So to accumulate or buy more of that it will be forced upon the buyer to pay a premium on it, it will not ever go it will never go to a discount. And the
30 00:05:49,320 --> 00:05:59,010 opposite is seen with the bearish conditions when the underlying base asset or benchmark is moving higher. The reason why that heavy distribution is taking
31 00:05:59,010 --> 00:06:07,620 place is because they're selling it they don't want to hold on to it for higher prices. Because their view from a smart money's perspective is this recent rally
32 00:06:07,620 --> 00:06:15,510 higher on the base asset or benchmark or in this case would be represented by an example like the Dow Jones. Just because the Dow Jones is making higher highs
33 00:06:15,540 --> 00:06:25,410 doesn't mean always that's underlying strength, it could be just a heavy distribution cycle. And you'll see that with heavy numbers of stocks failing to
34 00:06:25,410 --> 00:06:35,910 make higher highs for the s&p 500 and the NASDAQ Composite Index may be failing to make a higher high. And when that happens, that is a warning sign that you're
35 00:06:35,910 --> 00:06:53,520 probably in a distribution cycle. Okay, interest rate triad. Again, we start with the 30 year treasury bond market, the 10 year note in the five year note.
36 00:06:55,830 --> 00:07:04,410 Okay, by overlaying these three markets, you'll be able to highlight when accumulation or distribution is in the interest rate market. And when this takes
37 00:07:04,410 --> 00:07:15,960 place, it represents Smart Money movement, or how you as a trader can view smart money in the form of seeing where accumulation in buying or distribution and
38 00:07:15,960 --> 00:07:26,640 selling is actually occurring in the marketplace. The three interest rates should confirm each higher high or lower low at moments when the US Dollar Index
39 00:07:26,760 --> 00:07:40,170 is at a significant price point. Failure swings highlight Smart Money participation in the markets and trading opportunities are validated. For
40 00:07:40,170 --> 00:07:47,070 instance, let's look at the top we see this graph depiction and this could be the 30 year treasury, it could be the 10 year or it could be the five year
41 00:07:47,430 --> 00:08:01,650 there's no demand on either one of these three being the failed lower low. You just need one to break that pattern of moving lower. And when it happens, it
42 00:08:02,220 --> 00:08:13,830 invariably will show Smart Money participation in the marketplace. Because large volumes will be moving by way of their entries and exits, it causes that real
43 00:08:13,830 --> 00:08:23,670 supply and demand factor take place in pricing. So therefore, the model will show underlying strength in one of the interest rates. In other words, they
44 00:08:23,670 --> 00:08:32,580 won't make a lower low. The one on the bottom most obviously makes a lower low just like the one on the top graphically. But the one in the middle that's
45 00:08:32,580 --> 00:08:41,580 highlighted in blue, that is representing a failure swing. So when that happens, what we're seeing is that there's an interest rate shift. So there's going to be
46 00:08:41,790 --> 00:08:50,790 a shift in the marketplace. And if this occurs at a moment when you're identifying a potential institutional order reference point or focal point in
47 00:08:50,790 --> 00:09:00,420 the US Dollar index that confirms that particular idea, for instance, if you're looking for a bullish order block on the dollar index, if you're looking for a
48 00:09:00,930 --> 00:09:12,330 buy at a bullish order block or supposin support to come into the marketplace for the dollar index, you would see a opposite of this indication here. You
49 00:09:12,330 --> 00:09:22,170 would see a higher high probably on two of the interest rates but a lower high on one of them and what that would do is it would confirm the bullish order
50 00:09:22,170 --> 00:09:23,520 block for the dollar index
51 00:09:31,230 --> 00:09:41,220 Okay, so when you're looking at the interest rate markets now every chart I've shown you here, you can get this at bar chart.com It's free. It doesn't cost you
52 00:09:41,220 --> 00:09:52,410 any money to get that that charting service from them. Not looking at the chart like this. It's it's not easily ascertain what it is. It's supposed to be
53 00:09:52,410 --> 00:10:02,520 telling you. And this is the reason why evades majority, simply because we can show a chart plot and open high low On close on these specific interest rate
54 00:10:02,520 --> 00:10:14,340 markets doesn't always indicate understanding. And specifically, going through the 30 year, the 10 year and the five year like we just did, having these on
55 00:10:14,340 --> 00:10:27,210 your charts, your analysis of the markets, if you break them down in the right manner, just simply having a chart doesn't do it. It's not found with your
56 00:10:27,210 --> 00:10:34,890 traditional technical analysis, you have to look at things and want a comparative basis. Okay, so what I mean by that, let's take a closer look. And
57 00:10:34,890 --> 00:10:44,250 we'll look at this move and the dollar index just took place, the week of this recording, you see, the dollar index came down into that 99 point 50 level, and
58 00:10:44,250 --> 00:10:54,210 had an aggressive rally away. We talked about the dollar, being bullish in this area in the market moved higher all week as a response to that strong move off
59 00:10:54,210 --> 00:11:07,380 of 9950 level. But if we go back and look at the interest rate market, okay, this is the 30 year treasury bond market. This is a 90 minute chart, okay, and
60 00:11:07,380 --> 00:11:23,550 I'm looking at over about 15 to 18 days. And you can get you can do all that on bar chart.com. The, the bond market between the fifth and the eighth, and
61 00:11:23,550 --> 00:11:37,080 seventh, in other words, there was a failure swing that you can clearly see in the 30 year treasury bond market. So onwards, we had a failed higher high. Now,
62 00:11:37,080 --> 00:11:50,550 when this takes place, by itself, it doesn't mean anything. But if you're looking for things to justify a long on the dollar, and you see a lower high on
63 00:11:50,880 --> 00:12:04,800 the 30 year bond market, then we go to the lower timeframe interest rate and we're looking at another opportunity to compare and the same highs. This one is
64 00:12:04,800 --> 00:12:14,340 relatively unchanged, we'll just say it's flat to neutral. So it didn't make a lower high in in comparison, but it still didn't make a considerable higher high
65 00:12:14,340 --> 00:12:25,860 either. And finally, for the fight here, we can see that there is clearly a higher high formed on the five year interest rate or short term. So in the short
66 00:12:25,860 --> 00:12:37,650 term curve, we meet a higher run on a five year note, an unchanged high on the 10 year note and the lower high on the third year. Now by itself. That
67 00:12:37,650 --> 00:12:48,840 highlights there's a shift in the interest rate market. Now what can we first start with this module that interest rates are the number one leading driver for
68 00:12:48,840 --> 00:12:58,020 price action in the currency markets. There's nothing else that drives markets more wild and in currencies than the interest rates. That's the maths what makes
69 00:12:58,020 --> 00:13:07,680 the whole world go round. So if we understand that we're seeing a divergence between the actual underlying five year 10 year and 30 year interest rate
70 00:13:07,680 --> 00:13:18,810 markets, you can see that shift is pronounced it's you can clearly see it. You don't go in to looking at the bond market just for these types of scenarios. You
71 00:13:18,810 --> 00:13:29,940 have to have a predetermined idea of what the market that you're about to trade should see in terms of bullishness or bearishness. That brings us back to the US
72 00:13:29,940 --> 00:13:41,340 Dollar Index, the same reference point in time between the fifth and the eighth or so we saw that the dollar index went lower, made a lower low, and it traded
73 00:13:41,340 --> 00:13:52,140 down into a significant price level. Now this is on a closing basis. And that's all you need. But the point is, we're seeing a significant divergence between
74 00:13:52,170 --> 00:14:06,120 the lower low on the dollar index, and that of the 30 year treasury bond failing to make that higher high as it should have made comparably. When price moves
75 00:14:06,120 --> 00:14:11,820 into previous levels of institutional order flow, we as traders have to anticipate dynamic price movement
76 00:14:15,600 --> 00:14:27,060 that looks like this. And we talked about this this week in the live sessions. We had an old order block back in midpoint of November, it was the last down
77 00:14:27,060 --> 00:14:35,670 candle that had already been traded back down into it in November 15. One more time, and it bounced away from that but we trade all the way back down this week
78 00:14:35,820 --> 00:14:45,780 during the eighth of December just to get back into that 9950 level. And it was strongly rejected in the market rally hard on the dollar index, which obviously
79 00:14:45,780 --> 00:14:56,040 would do what for foreign currencies. It would give us reasons to trust they're shorter blocks, bearish turtle suits, or return back to fair value closing in
80 00:14:56,760 --> 00:15:04,980 big ranges that dropped the lower once those are closed. Then after a retracement higher, we could look for continuation and roll over for lower
81 00:15:04,980 --> 00:15:16,980 prices on foreign currencies. But this previous order block is what you would be looking for. At that moment when price trades into that order block, you want to
82 00:15:17,010 --> 00:15:26,970 take a look at the interest rate markets. Let's see if there's any clue that the smart money is working that level. So many people ask me, How do I validate what
83 00:15:26,970 --> 00:15:36,120 we're about to trade off of. And I just told you with just teaching, if you can see the interest rate divergence or interest rate, try by looking at those 3010
84 00:15:36,120 --> 00:15:44,790 and five year if there's a divergence between the three and prices hitting in a specific order block on the dollar index, that gives you the green light to go
85 00:15:44,790 --> 00:15:56,400 in and start refining the idea on that trade, because it's most likely a high probability setup. So if we saw a bullishness for the dollar index, then
86 00:15:56,400 --> 00:16:07,200 obviously we would be looking for bearish situations for the fiber. And the Euro USD, we had a level of buy stops indicated before the week started. And the Mark
87 00:16:07,200 --> 00:16:18,600 came all the way back up to an old reference point. At 108 65, which is an old low if you go back farther on your charts, I'll leave that for your homework.
88 00:16:18,810 --> 00:16:27,870 But if you take a look at what's happened here, the market rallied back above that 108 15 went to a 20. clearing out the buy stops are all way up through to
89 00:16:27,870 --> 00:16:38,460 108 65. Trading back to an old low. It's not shown on this chart. Again, I'll leave that to you for your own homework. But the selling scenario was justified
90 00:16:38,460 --> 00:16:43,530 because we've seen the bullishness on the dollar, that's the reason why we were expecting the dollar keep pressing higher this week, all through the rest of the
91 00:16:43,530 --> 00:16:54,480 week. And it kept doing that. And as it relates to the foreign currencies, it just kept driving them lower. In cable failed to make a higher high when Euro
92 00:16:54,510 --> 00:17:06,180 dollar made, the higher high and dollar made a lower low. So it's not always just simply looking for a divergence in one specific location or one asset, you
93 00:17:06,180 --> 00:17:13,140 had to blend a couple of things, sometimes you get to understanding what the smart money is doing, you can see that the market has a couple of different
94 00:17:13,140 --> 00:17:22,020 opportunities to be short, relative to the strong dollar. But what makes that strong dollar so significant is that it had a divergence in the interest rate
95 00:17:22,020 --> 00:17:31,050 triad. So 30 year tenure five year had a failure swing at the moment that the dollar was trading down here. So once you see that, and it gets everything back
96 00:17:31,050 --> 00:17:39,450 in sync, where the markets gonna be driving in one direction or another based on what direction the interest rates are going. So if the interest rate markets are
97 00:17:39,450 --> 00:17:47,790 dropping lower, that means interest rates are gonna go higher, which means the interest rate is going to drive the dollar index higher, and the dollar index is
98 00:17:47,790 --> 00:17:56,550 going to go higher, that's going to drive foreign currencies lower, and everything fits together like a like a cop, you know, and all the gears come
99 00:17:56,550 --> 00:18:04,950 together and you start turning. Everything makes sense. But it doesn't always work like that. Sometimes there's a shift that takes place on a longer term
100 00:18:04,950 --> 00:18:13,860 basis. And it may mess up things on a short term time basis. And you'll have to allow some of those things to come up in your trading. And just trust the fact
101 00:18:13,860 --> 00:18:23,490 that over a long period of time, these scenarios will repeat themselves. And when it does, it'll give you a plethora of trading opportunities. Alright, so
102 00:18:23,490 --> 00:18:32,940 what do we do with this information? You know, what can we do to build some kind of an action plan so we can use the information in a context where it helps us
103 00:18:33,030 --> 00:18:44,940 not just talk about in hindsight, but we have to use the points of focus taught in the first month of the mentorship. When price action trades to a focus point
104 00:18:44,940 --> 00:18:54,270 like a waterblock a liquidity pool, liquidity void or fair value gap,
105 00:18:55,890 --> 00:19:04,950 you refer to the interest rate triad and the dollar index. This will confirm smart money is behind your trade idea. If there is no obvious indication that
106 00:19:04,950 --> 00:19:15,870 they are moving large funds, pass on the trade idea and look for new ones that do. So what do I mean by that? If you're looking to be a buyer of dollar, the
107 00:19:15,870 --> 00:19:24,510 interest rate market is going to show you the divergence that I showed here today with a failed higher high among all three, they should all be moving
108 00:19:24,630 --> 00:19:35,190 higher highs if the dollar is moving lower. But if we see a bearish tone on $1 index, this is what you would see you would see the interest rate markets making
109 00:19:35,190 --> 00:19:44,490 a lower low, another one making a lower low but eventually one of them will fail to make that lower low and what that'll do that'll validate the sell signals
110 00:19:44,490 --> 00:19:55,080 that you're getting in the dollar index at a bearish order block at a old high that's been ran out for liquidity pool or trading up into a fair value gap
111 00:19:55,110 --> 00:20:04,260 closing in the range, then you can expect to see that dollar roll lower and interest rates Then on these three to start trading higher in their price, which
112 00:20:04,260 --> 00:20:14,760 means interest rates will be dropping, because as these interest rates on charts as they move up or trend higher, that's actually interest rates declining. And
113 00:20:14,760 --> 00:20:27,060 that's going to be bearish for dollar. So hopefully this has given you one more insight to understanding how to validate the order block liquidity pools and
114 00:20:27,090 --> 00:20:34,890 liquidity voids and fair value gaps. It's not simply just looking for every up candle to sell into or every down candles up, buy into. You want to look behind
115 00:20:34,890 --> 00:20:43,020 the scenes and get closer to the underpinnings of the marketplace, because the smart money is going to make a very clear fingerprint when they're in there. And
116 00:20:43,020 --> 00:20:52,410 it's going to be seen in a shift in the interest rate markets like this and it validates your setups. So until I talk to you next time, I wish you good luck
117 00:20:52,590 --> 00:20:53,250 and good trading