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ICT Mentorship Core Content - Month 05 - Interest Rate Differentials
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ICT Mentorship Core Content - Month 05 - Interest Rate Differentials

Introduction

In this lesson, the speaker introduces interest rate differentials and how they can be used to select forex pairs for trading.

Central Bank Interest Rates

  • Central bank interest rates are a fundamental basis for buying or selling a particular currency.
  • A list of global currency interest rates from central banks can be found on fxstreet.com.
  • When selecting a currency to buy, look for one with a high interest rate. Conversely, if expecting weakness in a country's economy, look for weak interest rates.

Using Interest Rate Differentials for Trading

  • Funds will seek to trade high yielding currencies against weak yielding currencies.
  • Selecting a pair for trading involves choosing a country with a high interest rate and pairing it with one that has a low interest rate.
  • Determine the forex pair coupling based on those two respective countries.

Example Trade

  • An example is given where the Australian dollar is paired with the US market as it has weaker yields.

Fundamental and Technical Analysis of Forex Market

In this section, the speaker discusses how to position oneself in the forex market by aligning with central bank interest rates and using smart money clues. The speaker uses the example of the Australian dollar to illustrate how fundamental analysis can be coupled with technical analysis for profitable trading.

Positioning in Forex Market

  • To position oneself in the forex market, one should align with central bank interest rates.
  • Smart money clues such as seasonal tendency and open interest can confirm a trade setup.
  • Directional confirmation of a setup is necessary before entering a trade.

Example: Australian Dollar

  • Long-term support level at 71.50 identified on cash price chart for Australian dollar.
  • Open interest has been declining, indicating short covering by smart money or large commercial traders.
  • Higher yielding interest rate of 1.5% from Australian central bank coupled against weaker 0.75% federal reserve rate for US dollar has led to sharp rally in AUD/USD pair.
  • Technical analysis coupled with high odds probability scenarios can lead to profitable trades.

Higher High in Dollar Index and Lower Low in Australian Dollar

In this section, the speaker discusses how a higher high in the dollar index and a failure to make a lower low in the Australian dollar can be observed.

Observations

  • A higher high in the dollar index was seen.
  • The Australian dollar failed to make a lower low.

Forex Pair Selection with Low Interest Rate

In this section, the speaker discusses selecting a pair with a low interest rate and determining the forex pair that couples for that trade.

Steps

  • Select a pair with a low interest rate.
  • Select a country with a high interest rate.
  • Determine the forex pair that couples for that trade.
  • Use higher yielding currency of 0.75 percent.

Example of Trading Dollar Yen Pair

In this section, the speaker provides an example of trading using the dollar yen pair.

Steps

  • Japanese economy has negative central bank rate.
  • Two respective countries and their currencies would be paired up in form of dollar yen.
  • Look for strong resistance on higher time frame charts.
  • Wait for smart money clues that it's being sold.
  • Look for seasonal tendencies and/or open interest to confirm trade.
  • Look for directional confirmation from dollar index to qualify up move.

Expectation of Weaker Japanese Yen Against Stronger US Dollar

In this section, the speaker explains how weaker Japanese yen against stronger US dollar is expected based on central bank interest rates and technical analysis.

Observations

  • Expectation is that weaker currency is Japanese yen against stronger US dollar which has higher yielding central bank rate.
  • Dollar yen pair is expected to strengthen or go up in charts.

Technical Analysis of Cash Price of Japanese Yen

In this section, the speaker discusses technical analysis of cash price of Japanese yen.

Observations

  • Weekly chart shows bearish order block at 9800 level.
  • Price trades up into that 90 big figure and weakness is seen from that point.
  • Massive decline seen in cash price of Japanese yen based on central bank interest rate and differential between two countries.
  • Large funds trend filing in nature look at fundamental reasons to trade specific currencies.

Using Central Bank Interest Rates for Forex Trading

In this section, the speaker explains how using central bank interest rates can lead to massive price moves in forex trading.

Observations

  • Big moves come by way of information drawn by differentials between central bank interest rates.
  • Coupling them with strong technicals and seasonal tendency understanding leads to massive price moves based on higher time frame premise.
  • Trades are more inclined to be used on a higher time frame basis because large funds are trend filing in nature.

Long-Term Forex Trading Strategy

In this section, the speaker discusses a long-term forex trading strategy that involves analyzing currency pairs on the central bank level and looking back over the last six months to identify setups based on higher timeframe support and resistance levels, institutional order flow ideas, and open interests. The speaker advises traders to justify why in hindsight certain fundamentals were in alignment with significant price moves.

Analyzing Currency Pairs

  • Traders should look back three to six months for currency pair moves to take place.
  • Exotic pairs with a higher yielding interest rate versus a lower interest rate can be paired up in a forex pair.
  • This approach is simplistic and coupled with fundamental analysis of how funds move large scale into or out of a particular currency based on the interest rate.

Conclusion

  • The speaker concludes by wishing traders good luck and good trading.
Playlists: 2017 ICT Private Mentorship Core Content Month 05
Video description

2017 Premium ICT Mentorship Core Content Video Lectures Audio and visuals are exactly as they were distributed in January 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.