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

Introduction

• Focus on commodities for June 2017.
• Disclaimer: Discussion in the capacity of paper trading, not licensed trade advice.

Background

• Influence: Influenced by Ken Roberts and Larry Williams.
  • Ken Roberts: Basic commodity trading course.
  • Larry Williams: Known for open interest concepts.

Understanding Open Interest

• Definition: Total outstanding contracts held by market participants at the end of each trading day.
  • Volume: Measures pressure/intensity behind a trend.
  • Open Interest: Measures flow of money into futures market.
• Calculation: Total of either buyers or sellers, not both.

Importance of Open Interest

• Provides additional insight in commodity markets.
• Two views:
  • Measuring trend/price move strength.
  • Tracking large commercial traders' footprints.

Using Open Interest in Trends and Swings

• Uptrend with Rising Open Interest: Bullish sign.
  • New sellers replace stopped out shorts. Longs get stronger.
• Downtrend with Rising Open Interest: Bearish sign
  • New buyers replace stopped out weak longs. Shorts get stronger.
• Uptrend with Falling Open Interest: Bearish sign.
  • Smart money banking gains. Weak shorts exiting.
• Downtrend with Falling Open Interest: Bullish sign.
  • Shorts covering profitable positions.

Open Interest in Consolidations

• Consolidation with Rising Open Interest: Bearish sign.
  • Indicates commercial hedgers are shorting.
• Consolidation with Falling Open Interest: Bullish sign.
  • Indicates commercial hedgers covering shorts.

Practical Application

• Commercials as Largest Liquidity Provider:
  • If open interest is high, commercials expect lower prices.

Tools and Resources

• BarChart.com, CRB Trader, PriceCharts.com
  • Useful for plotting open interest and analyzing trends.

Seasonal and Contract Expiration Trends

• Importance of considering seasonal averages and contract expirations.
• Example: June to September can indicate shifts in open interest behavior.

Case Studies

British Pound (2010)

• Monthly Chart Analysis:
  • Bullish order blocks identified.
  • Commercials were net long.
  • Open interest dropped below seasonal average at support level.
  • Resulted in a significant rally (800 pips).

Euro (2010)

• Weekly Chart Analysis:
  • Commercials were bullish.
  • Price rallied from support level.
  • Open interest dropped below seasonal average.
  • Resulted in a large price move (1,500 pips).

Conclusion

• Open interest concepts used for swing trading and aligning with larger market moves.
• Combines historical data, PD array matrix, and COT hedging programs.
• While not providing daily/weekly signals, offers framework for significant trades.

End of Lesson

• Encouragement for good luck and good trading.