93-ICT Mentorship Core Content - Month 10 - Open Interest Secrets and Smart Money Footprints

Last modified by Drunk Monkey on 2022-10-18 11:36
1 00:00:00,599 --> 00:00:11,579 ICT: Okay, folks, here's our last discussion for commodities for the month of June 2017 content. We will be revisiting commodities in the month of August with
2 00:00:11,579 --> 00:00:21,299 the top down analysis templates. But as a reminder, it's very important to read the disclaimer here. And to remind you also, I'm not a commodity trade advisor.
3 00:00:21,989 --> 00:00:34,349 I'm not likely to get trade advice, everything that's been discussed here as it relates to commodities isn't capacity of paper trading only. Okay, folks, June
4 00:00:34,349 --> 00:00:44,669 2017, I think mentorship ICT commodity trading, Lesson five, open interest and Smart Money footprints, the real secret to using open interest.
5 00:00:49,530 --> 00:00:58,170 Okay, folks, open interest in the commodity markets. Alright. So when I first started as a commodity trader, everyone is familiar with me understands that I
6 00:00:58,170 --> 00:01:13,980 got really baptized by Ken Roberts, much like most of the commodity traders in North America, back in the 80s and 90s, he put out a rather basic commodity
7 00:01:13,980 --> 00:01:33,630 trading course. And while it was not enough to make money with it did allow me to develop a insatiable desire about financial markets. So by getting involved
8 00:01:33,840 --> 00:01:44,250 with Ken Roberts, buying his course, obviously, he sold my name to a mailing list. And then Larry Williams of all people on the trading circuit got a hold of
9 00:01:44,250 --> 00:01:57,120 my address and like everyone else, solicited information, and I purchased it. So Larry Williams was the first in the list of my mentors and his open interest
10 00:01:57,120 --> 00:02:07,740 concepts is basically widely known. And I built on what he gave as general guidelines. So everything I'm going to teach you here is pretty much what I
11 00:02:07,740 --> 00:02:21,600 learned from Larry Williams with a couple twists of my own, that I picked up along the way. So before we get we have to outline in define what open interest
12 00:02:21,600 --> 00:02:28,590 is because I know some of you are going to ask, you know what is open interest. And while that could be answered simply with a Google search, for completeness
13 00:02:28,590 --> 00:02:35,730 sake, I'm going to include it here. The open interest is the total number of outstanding contracts that are held on market disciplines at the end of each
14 00:02:35,730 --> 00:02:47,190 trading day. Now, where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into a futures market. Now for
15 00:02:47,190 --> 00:02:56,070 each seller of a futures contract, it must be a buyer of that contract. Thus, a seller and a buyer combined to create only one contract. Therefore, to determine
16 00:02:56,310 --> 00:03:08,340 the total open interest for any given market, we need to only know the totals of one side or the other. buyer's or seller's not the sum of both. The commodity
17 00:03:08,340 --> 00:03:16,260 markets have a built in an advantage or additional insight shared by the way of open interest. The study of Open Interest can provide a trader a very important
18 00:03:16,260 --> 00:03:28,950 perspective in a commodity there are two ways to view open interest as a trading tool. Measuring the strength of a trend or price move and tracking the
19 00:03:28,950 --> 00:03:42,420 footprints of the large commercial traders. We're gonna first take a look at measuring trends and or price moves with open interest. Using open interest in
20 00:03:42,420 --> 00:03:54,330 trends and swings, if prices are in an uptrend and open interest is rising. This is a bullish sign. There are shorts who are being stopped out but new sellers
21 00:03:54,360 --> 00:04:04,920 are taking their place. As the market continues to rise the Long's get stronger and the shorts get weaker. If prices are in a downtrend and open interest is
22 00:04:04,920 --> 00:04:15,090 rising, this is a bear sign weak Long's are being stopped out. But new buyers are taking their place. As the market continues to fall, the shorts get stronger
23 00:04:15,090 --> 00:04:23,730 and the lungs get weaker. Put another way, as long as the open interest is increasing in a major trend. It will have the necessary sponsorship to continue.
24 00:04:26,400 --> 00:04:35,370 If prices are in an uptrend and open interest is falling. This is a bearish sign. The old long's the smart money in his case our banking gains, as they're
25 00:04:35,370 --> 00:04:43,920 liquidating. They are replaced by new buyers who do not have the strength on balance. But the declining open interest is an indication that the weak shorts
26 00:04:43,920 --> 00:04:54,660 are also exiting. They will be replaced by new shorts who are stronger than no old shorts that were trading earlier but got squeezed out. If prices are in a
27 00:04:54,660 --> 00:05:03,270 downtrend and open interest is falling, this is a bullish sign. Smart Money the shorts are recovering and liquidating profitable shorts. They will be replaced
28 00:05:03,270 --> 00:05:12,780 by new shorts not as strong as they were. But the declining open interest indicates the squeezed blogs are bailing. They will be replaced by new Long's
29 00:05:12,780 --> 00:05:26,160 who are not as weakened by the lower prices as the old Long's were put another way, when the supply of losers is exhausted the downtrend ends are using open
30 00:05:26,160 --> 00:05:27,600 interest in consolidations.
31 00:05:30,420 --> 00:05:40,440 If prices are in a consolidation and open interest is rising, this is a bearish sign. The reason is the Street Money plays alongside rising open interest in a
32 00:05:40,440 --> 00:05:48,390 trading range suggest commercial hedgers and professionals are taking the short side and the uninformed speculators will fall victim to the downside break in
33 00:05:48,390 --> 00:05:59,130 price. Now think about what causes open interest. It's the commercial hedges are the largest liquidity provider and they offer the commodity for purchase for
34 00:05:59,130 --> 00:06:08,880 trading. If they're willing to sell a lot of it, that means that they don't believe that price is gonna go higher, otherwise, they would hold out and wait
35 00:06:08,880 --> 00:06:19,860 for higher prices. So since they're most likely the most largest pool of counterparty to commodity traders, if the open interest is rising, they have an
36 00:06:19,860 --> 00:06:30,720 expectation that prices are not going to increase. Because on balance, they're larger as a supplier or seller of a commodity than they are a buyer. So open
37 00:06:30,720 --> 00:06:40,710 interest increasing provides a measure of their willingness to be a heavy seller. So open interest is high that means they have a very high interest.
38 00:06:41,160 --> 00:06:52,410 Again on seeing lower prices. We can see that graphically here with the accumulative line that's been drawn crudely by myself. When our increases while
39 00:06:52,410 --> 00:07:01,620 the market stays in a range, price will break down generally and the commercials will be the indication of that. Now when we see this, we want to couple this
40 00:07:01,620 --> 00:07:09,690 with CIT hedging programs or the net traded position as a whole we can look at what the commercials are dealing in this case, we want to see the commercials
41 00:07:09,990 --> 00:07:21,690 net short or increasing their short selling. Now if prices are in a consolidation and open interest is falling, this is a bullish sign. The reason
42 00:07:21,870 --> 00:07:32,700 is the commercials hedgers who are most likely shorting or covering the street money will be shorting and expecting a breakout lower in price. This is seen
43 00:07:32,700 --> 00:07:43,410 graphically with the cumulative line at the bottom here. That will be open interest declining while price stays in a range at a key support level. And the
44 00:07:43,410 --> 00:07:54,240 market breaks to the upside. Ideally, we want to look for long term or higher timeframes. For levels in price to anticipate this open interest concept. In
45 00:07:54,240 --> 00:08:02,670 times where price is trading at key support levels on a higher time frame basis, open interest will decline or drop while price is consolidating at or near a
46 00:08:02,670 --> 00:08:12,000 higher Time Frame support or as we define a discount array, as we outlined institutional reference points. This will be bullish and anticipate an upswing
47 00:08:12,000 --> 00:08:20,670 in price. Conversely, we want to look for long term or higher timeframe resistance levels in price to anticipate this open interest concept in times
48 00:08:20,670 --> 00:08:28,950 where price is trading at a key resistance level on a higher timeframe basis. Open Interest will we will rise while price is consolidating at or near the
49 00:08:28,950 --> 00:08:37,530 higher timeframe resistance or a premium array as we outline institutional reference points. This will be bearish and we anticipate a downswing and price.
50 00:08:40,650 --> 00:08:50,880 Now when we look at open interest, there's obviously the way we can see this as we can see it on bar chart.com. And let me just say this bar chart.com If you do
51 00:08:50,880 --> 00:09:02,640 the total open interest in volume, that will give you the true open interest reflection for declines in rallies in its q2 basis line and compare that with
52 00:09:02,640 --> 00:09:14,280 price action. But to get a better picture, you're going to have to avail yourself a resource or two. And I like CRB trader. And I like price charts.com.
53 00:09:14,880 --> 00:09:22,950 And the reason why if you're going to be a commodity trader, and yes, I still subscribe to these mediums even though I don't actively trade the commodities
54 00:09:22,950 --> 00:09:33,660 market. I use it for my Forex analysis. So when I'm looking for quarterly shifts or if I'm looking for mega trades as we're going to teach next month, the idea
55 00:09:33,660 --> 00:09:44,040 is I look at the seasonal average of open interest and both price charts.com and CRB trader both plot this for you
56 00:09:45,330 --> 00:09:56,460 what it is, as you can see the dotted unitive line here and all the arrows here you can see where it's pointing to it and that is the average of a multi year or
57 00:09:56,460 --> 00:10:05,280 as I like to look at it as a seasonal average over the last few Here's what open interest usually has done. And they can, as you can see around the June,
58 00:10:05,280 --> 00:10:15,120 September and December time period, which is generally the contract, expiration and rollover period. And when I teach open interest, invariably someone's going
59 00:10:15,120 --> 00:10:25,890 to say, Well, what you're seeing there is the contract, rollover and expiration. And while that's generally built into it, yes, it's not indicative of the entire
60 00:10:25,890 --> 00:10:36,360 answer. Okay? So there are going to be times when open interest reflects a great deal of buying and a great deal of shorting by the commercial. So if we are
61 00:10:36,360 --> 00:10:50,580 seeing contract expiration, and traders are trading, for instance, say this is copper, okay, if copper prices are seeing a bull market, just because the
62 00:10:50,640 --> 00:10:59,490 contract expiration, is what we're seeing here suggested, I'm not saying these are the delivery month explorations, but this is say that for instance, they for
63 00:10:59,490 --> 00:11:12,240 it is, or it's the s&p 500, for instance, okay, these months because they're expiring as they normally would, when upon delivery. When that last trading day
64 00:11:12,240 --> 00:11:21,240 takes place, if traders are still bullish or bearish, they're just not going to stop trading, because that contract expires, they're going to sell or buy to
65 00:11:21,240 --> 00:11:32,940 cover their position in the nearby contract and roll right over into the next month out. So open interest will still be reflected. It won't, it won't change
66 00:11:32,940 --> 00:11:43,710 anything, okay, because we'll be replacing one for one. So by looking at open interest like this, what I like to see is it open interest declines, or in this
67 00:11:43,710 --> 00:11:55,500 case, many times it can rally above, if it goes above the seasonal tendency, or the average of what that dotted line is, for instance, from the period of June,
68 00:11:55,980 --> 00:12:07,590 all the way through to the second week of September, open interest, which is the solid dark line. What I do is I look at the difference between open interest
69 00:12:07,620 --> 00:12:19,380 actual number and a seasonal average by getting a better feel or intensity about what the commercials are doing as a whole. By taking the black line and
70 00:12:19,560 --> 00:12:27,750 comparing it to where the dotted line is the dotted line, again, is the average over several years. And the actual is the solid black line. Okay, so the solid
71 00:12:27,750 --> 00:12:37,590 black line is above between June and September, the normal multi year average. So that's actually, if it were in a bearish environment, we are trading at a
72 00:12:37,590 --> 00:12:45,420 resistance level, I could be expecting some really nice increases in open interest. At a resistance level, while it's above the average of its open
73 00:12:45,420 --> 00:12:59,130 interest normal seasonal, that would be bearish. But when it drops down below the average, or that dotted line of open interest, that's a multi year average
74 00:12:59,160 --> 00:13:07,380 of open interest. So when that black line drops below that dotted line, what that's indicating here is the commercials are really covering shorts, they're
75 00:13:07,380 --> 00:13:17,610 well below in September than their average of open interest movement. So in this case, if the commodity that we're trading was at a bullish environment, you
76 00:13:17,610 --> 00:13:26,550 know, what's at a long term support level at discount array, and we seen this condition and price was in a consolidation that would be extremely bullish. And
77 00:13:26,550 --> 00:13:28,110 I would expect that price to go higher.
78 00:13:33,630 --> 00:13:42,210 Okay, so let's take a look at a case study here. We're looking at the British pound. And I have a monthly chart here. And we're looking back in the 2010 time
79 00:13:42,210 --> 00:13:52,590 period. And I want you to see that we have a bullish order block outline from 2009. It's trading and then we have a bullish order block from early part of
80 00:13:52,590 --> 00:14:02,370 2010. So we have the bullish order block noted here. And we have a another bullish order block here, we're gonna look at the second condition here because
81 00:14:02,670 --> 00:14:13,530 we have institutional order flow suggesting higher prices because price had respected a mid 2010 bullish order block response off of the 2009 bullish order
82 00:14:13,530 --> 00:14:23,160 block. And then price rally through that higher order block that the second one's being denoted here. And price trades down to it and finds some support
83 00:14:23,160 --> 00:14:35,160 there. So we're gonna go into that price level and get a better look. And we're gonna go into a weekly chart we can see at that same period in September 2010.
84 00:14:35,670 --> 00:14:42,870 The commercials were net long, and we're gonna be looking specifically at that little nodule in price or that low. You can also see it's trading back down into
85 00:14:42,870 --> 00:14:58,410 an old bullish breaker seen in the first quarter of 2010. Okay, we're going to take ourselves over to an old chart on CRB trader and I'm going to highlight
86 00:14:58,410 --> 00:15:10,200 that 153 level that's the Higher timeframe support level or bullish order block. And we zoned in right in here during our period of consolidation and price. Open
87 00:15:10,200 --> 00:15:20,190 Interest takes a dive and look what it does it goes down below the dotted line or the average or seasonal tendency for open interest that is extremely bullish
88 00:15:20,310 --> 00:15:28,380 price as a result rallies with the open interest dropping at a support level while prices and consolidation with the net tradition shown the commercials are
89 00:15:28,410 --> 00:15:37,170 bullish. That's a wonderful condition to be in expecting higher prices. footprints of smart money's clearly being shown here. They can't hide what
90 00:15:37,170 --> 00:15:48,270 they're doing, covering shorts and price moves in the British pound over 800 points. So in a short span of time in less than two months, price sees a rally
91 00:15:48,270 --> 00:16:00,360 of 100 points or in the forex market that would be 800 pips. gaybraham. Look at another example here, Euro we're looking at the weekly chart here. The
92 00:16:00,360 --> 00:16:11,880 commercials are bullish, see them above the zero line right here and look at the extreme bullish reading we had prior to it just left to that when the price made
93 00:16:11,880 --> 00:16:28,560 its low and early part of 2010. Then we have price rallying off of that low and having a retracement off of 133 down into a support level of 126 126 is a
94 00:16:28,560 --> 00:16:38,130 bullish order block the last two down weekly candles. You see that? Is finding also the same time in bullish net traders decision right Can we see those last
95 00:16:38,640 --> 00:16:48,000 two down close candles here I'm highlighting the high of that series of two down weekly candles. Ours are bullish order block and price trading back down to that
96 00:16:48,030 --> 00:16:59,550 bullish order block as a discount array, again with commercials net long. So we're going to go into a daily chart back in 2010. You see how I have the range
97 00:16:59,550 --> 00:17:13,770 outlined a small little consolidation there and we see the 126 higher timeframe support level. Now it's same time we see open interest take a dive and again,
98 00:17:13,770 --> 00:17:23,160 what happens it drops down below the seasonal average of open interest. Again, we don't just simply look at that black solid line. That's not enough, it open
99 00:17:23,160 --> 00:17:31,560 interest is going to decline. As you can sometimes see with the average or the dotted black line. It does drop down in September. But look how much it drops
100 00:17:31,560 --> 00:17:44,130 down in actual open interest. That's totally different as a different storyline altogether. price moves in an amazing 1500 pips or points for this specific
101 00:17:44,130 --> 00:17:54,540 commodity open just drops at a support level, while prices and consolidation, net trade is bullish, amazing price response there. And look how fast price
102 00:17:54,540 --> 00:18:08,190 moves up. Does not spend a lot of time dilly dallying around it completely vaults from the 126 127 level, all the way up into the 140 twos. So again, in
103 00:18:08,190 --> 00:18:16,440 less than two months, 1500 points or in the forex market that will be over 1500 pips available as a price swing.
104 00:18:18,090 --> 00:18:27,210 So now when we talk about these things, obviously, we're not just giving you examples of where it works once in a while, because it works on the higher
105 00:18:27,210 --> 00:18:37,830 timeframe basis. So these open interest ideas are not day trades, they're really selected for Swing Trading, position trading, or to get your trading in sync
106 00:18:37,920 --> 00:18:47,550 with that larger move. Say for instance, we looked at this scenario and it was the first week of October, we can see that that price move has a lot more
107 00:18:47,550 --> 00:18:56,880 significance behind it because it's a large macro play. So there's going to be a dominant support structure behind it for higher prices. So, we can go back and
108 00:18:56,880 --> 00:19:04,530 look into that weekly chart and see where price may reach for for premium array. And while that still has not been fulfilled, we can be looking for day trades
109 00:19:04,530 --> 00:19:13,230 where the open is near the low of the day and then rally up or look for one shot one kill for expansions on the weekly range for a higher Friday close from the
110 00:19:13,230 --> 00:19:24,390 week's opening. So, the way I use open interest again is not to simply is it is open interest declining or is it rallying? I have to have it coupled with a
111 00:19:24,390 --> 00:19:34,410 higher timeframe level because understanding what the hedges are doing to commercials they have a more closely tied relationship to what prices actually
112 00:19:34,410 --> 00:19:44,280 doing based on what it should be doing fundamentally and they also look at the higher timeframe charts to the value price levels historically for valuation and
113 00:19:45,630 --> 00:19:55,740 the the idea of looking for support resistance on those higher timeframe charts by using our PD array matrix and coupling it with CBOT hedging programs and the
114 00:19:55,740 --> 00:20:05,280 net trader position. And now with open interest declining it supports or discount arrays or open interest increasing, while at resistance levels or
115 00:20:05,280 --> 00:20:16,440 premium arrays, we can anticipate much more stronger moves, much more predictable moves. And while it doesn't answer everything, and it doesn't give
116 00:20:16,440 --> 00:20:24,210 you a signal every day or every week, we can be looking for these moves a couple times a year, where it gives us a lot of framework to have all the timeframes we
117 00:20:24,210 --> 00:20:32,880 can trade at our disposal. So hopefully you found this trading lesson insightful. And until next time, I wish you good luck and good trading