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

ICT Mentorship: Commodity Trading Lesson 5 - Open Interest and Smart Money Footprints

In this lesson, the speaker discusses open interest in commodity markets and how it can be used to measure the strength of a trend or price move. The study of open interest can also provide insight into the footprints of large commercial traders.

Understanding Open Interest

  • Open interest is the total number of outstanding contracts held by market participants at the end of each trading day.
  • To determine the total open interest for any given market, we need to know only the totals of one side or the other (buyers or sellers), not the sum of both.
  • Open interest measures the flow of money into a futures market.

Using Open Interest in Trends and Swings

  • There are two ways to view open interest as a trading tool: measuring the strength of a trend or price move, and tracking the footprints of large commercial traders.
  • If prices are in an uptrend and open interest is rising, this is a bullish sign. The longs get stronger and shorts get weaker.
  • If prices are in a downtrend and open interest is rising, this is a bearish sign. Weak longs are being stopped out but new buyers are taking their place as shorts get stronger.
  • If prices are in an uptrend and open interest is falling, this is a bearish sign. Old long positions are banking gains as they liquidate; they will be replaced by new buyers who do not have as much strength on balance.
  • If prices are in a downtrend and open interest is falling, this is a bullish sign. Smart money shorts are covering and liquidating profitable shorts; they will be replaced by new shorts not as strong as before.

Conclusion

  • Open interest can provide traders with important insights into commodity markets.
  • It can be used to measure the strength of a trend or price move, as well as track the footprints of large commercial traders.

Understanding Open Interest in Consolidations

In this section, the speaker explains how to use open interest to identify bullish or bearish signs in consolidations.

Rising Open Interest in a Trading Range

  • If prices are in a consolidation and open interest is rising, it is a bearish sign.
  • The reason for this is that commercial hedgers and professionals are taking the short side, while uninformed speculators will fall victim to the downside break in price.
  • When commercial hedges offer a commodity for purchase for trading, if they're willing to sell a lot of it, that means they don't believe that price is going to go higher.
  • On balance, they're larger as a supplier or seller of a commodity than they are a buyer. So open interest increasing provides a measure of their willingness to be a heavy seller.
  • If open interest is high, that means they have very high interest again on seeing lower prices.

Falling Open Interest in Consolidations

  • If prices are under consolidation and open interest is falling, it is a bullish sign.
  • The reason for this is that commercials hedgers who are most likely shorting are covering while street money will be shorting and expecting a breakout lower in price.
  • This can be seen graphically with the cumulative line at the bottom here that would be open interest declining while price stays in range at key support level.

Using Cot Hedging Programs

  • To get an accurate picture of what's happening with open interest we want to couple this with cot hedging programs or net trader's position as whole.
  • We can look at what the commercials are doing; in this case we want to see them net short or increasing their Short Selling.

Anticipating Price Swings with Open Interest

In this section, the speaker explains how to anticipate price swings using open interest and higher time frame support or resistance levels.

Anticipating an Upswing in Price

  • When we look for long-term or higher time frame support levels in price, we can anticipate this open interest concept.
  • In 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 higher time frame support.
  • This will be bullish and anticipate an upswing in price.

Anticipating a Downswing in Price

  • Conversely, when we look for long-term or higher time frame resistance levels in price, we can anticipate this open interest concept.
  • In times where price is trading at a key resistance level on a high-time-frame basis, open interest will rise while price is consolidating at or near the higher time frame resistance.
  • This will be bearish and anticipate a downswing in price.

Using Resources to Analyze Open Interest

In this section, the speaker recommends resources to analyze open interest.

Barchart.com

  • We can see open interest on barchart.com by doing the total open interest and volume that will give us the true reflection of declines and rallies on cumulative basis line compared with price action.

CRB Trader and Pricecharts.com

  • To get a better picture of what's happening with open interest, we need to avail ourselves of resources like crb trader and pricecharts.com.
  • These platforms plot seasonal averages of multi-year data for us.
  • We can see where it's pointing to; that is the average of multi-year seasonal average over the last few years with open interest usually has done.
  • We can see around the June, September, and December time periods which are generally the contract expiration and rollover period.

Understanding Open Interest

In this section, the speaker explains how open interest can be used to gauge market sentiment and predict price movements.

Using Open Interest to Predict Price Movements

  • Traders will roll over their positions into the next month's contract upon expiration, so open interest will still be reflected.
  • Comparing actual open interest to the seasonal average can provide insight into market sentiment.
  • When actual open interest is above the seasonal average, it could indicate a bearish environment. Conversely, when it drops below the average, it could indicate a bullish environment.
  • If the commodity being traded is at a long-term support level and in consolidation while commercials are covering shorts, this would be extremely bullish and prices are expected to go higher.

Case Study: British Pound

In this section, the speaker uses a case study of the British pound to illustrate how open interest can be used to predict price movements.

Analyzing Open Interest in Conjunction with Price Levels

  • The speaker notes two bullish order blocks from 2009 and early 2010 on a monthly chart of the British pound.
  • On a weekly chart from September 2010, commercials were net long at a support level where price found some support.
  • Looking at an old chart on CRB Trader with a time frame support level of 153 during consolidation in price shows that when open interest drops below its seasonal tendency or average, it is extremely bullish. This was seen in conjunction with institutional overflow suggesting higher prices. As a result, prices rallied over 800 points in less than two months.

Case Study: Euro

In this section, the speaker uses a case study of the Euro to illustrate how open interest can be used to predict price movements.

Analyzing Commercials' Sentiment

  • On a weekly chart of the Euro, commercials were bullish with an extreme reading prior to price making its low in early 2010.
  • The speaker notes that commercials are often referred to as "smart money" and their sentiment can provide insight into future price movements.

Using Open Interest for Swing Trading

In this section, the speaker discusses how to use open interest for swing trading and position trading. He explains that understanding what the hedges are doing is important because they have a more closely tied relationship to what price is actually doing based on what it should be doing fundamentally.

Understanding Open Interest

  • Open interest takes a dive and drops down below the seasonal average of open interest.
  • Open interest drops at a support level while prices are in consolidation.
  • The way to use open interest is not just simply if it's declining or rallying, but coupled with a hard time frame level.

Using Open Interest for Swing Trading

  • Price moves up 1500 Pips or points for this specific commodity when open interest drops at a support level while prices are in consolidation.
  • These open interest ideas are not day trades but selected for swing trading position trading or to get your trading in sync with that larger move.
  • We can anticipate much stronger and predictable moves by using our PD array Matrix and coupling with cot hedging programs and net Trader's position.

Conclusion

  • By looking for these moves a couple times a year where it gives us a lot of framework to have all the time frames we can trade at our disposal.
Playlists: 2017 ICT Private Mentorship Core Content Month 10
Video description

2017 Premium ICT Mentorship Core Content Video Lectures Audio and visuals are exactly as they were distributed in June 2017. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN Trading performance displayed herein is hypothetical. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance trading results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. Trade at your own risk. The information provided here is of the nature of a general comment only and neither purports nor intends to be, specific trading advice. It has been prepared without regard to any particular person’s investment objectives, financial situation and particular needs. Information should not be considered as an offer or enticement to buy, sell or trade. You should seek appropriate advice from your broker, or licensed investment advisor, before taking any action. Past performance does not guarantee future results. Simulated performance results contain inherent limitations. Unlike actual performance records the results may under or over compensate for such factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profits or losses to those shown. The risk of loss in trading can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. If you purchase or sell Equities, Futures, Currencies or Options you may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain your position. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you may be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market makes a “limit move.” The placement of contingent orders by you, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.