All language subtitles for Lesson 4 - Premium Vs. Carrying EN

Welcome back folks.

Again, we're talking about commodity
trading and it's important that I remind

you the read the disclaimers here, and
I am not a commodity trade advisor.

I'm not licensed to get trade advice.

Everything that's mentioned
in these topics, referring to

commodities are specifically to
be viewed as paper trades only.

Okay.

Folks, the June, 2017, ICT mentorship,
ICT commodity trading, lesson four.

Premium versus carrying charge markets.

And this is going to provide you an
x-ray view of institutional order flow.

Okay.

When we look at commodities,
one of the best resources you

have@yourfingertipsandforfreeisonbarchart.com.

And this is what you'll see generally,
when you click on a commodity

and it'll pull up the contract
delivery months that it's available.

And we find out by going to the select
commodity tab over here and you scroll

down and you find whatever commodity
you want to do, your analysis on.

One of the things you want to do
periodically as a commodity trader

is once every two to three weeks,
you know, you want to be looking for.

Markets that are developing a premium.

Okay.

It used to be, when I first started
as a trader commodities, it would be

listed in the newspaper like wall street
journal and investor's business daily.

Not that they're not listed now, but
that's where I would usually scan.

I would look for.

Uh, premium or lack of premium
in the delivery months.

And we're looking at cotton here
and you can see that all the months

that are available for trading
for this particular commodity are

listed on bar charts, website.

Classically what you'll see when
we pull up for instance, soybeans,

and we're going to assume that the
column, it shows last here, that's

going to represent the closing price.

Now, obviously at the time of
this recording, I was getting

prices and they may not be
representative of closing prices.

So just for disclosure sake, but we're
going to assume for a moment that we

were looking at the market after the.

And we look at the closing price or
in this case, the last, and generally,

if there's a cash market that could
be seen or commodity they'll list

it first on bar chart, bar chart.com
and that'll be at the top of the.

And then immediately below that you'll
see the first contract delivery month

or what is referred to as the nearby
contract that immediate contract

month, right after the nearby is always
referred to as the next month out.

So.

We want to be looking at the nearby
in the next month out, always.

Okay.

In contrast to whether there is a premium,
when there is no premium, we have what is

referred to as a carrying charge market.

Now carrying charge market is
simply today's price viewed

in the nearby contract.

If today's price is nine 40 on
the July contract of 2017 soybean.

We could see in August the next month
out, there should be an increase

in net premium or closing price.

And we see it here.

So in July, 2017, soybeans closing price
would be representative of nine 40.

And in August it's closing price would
be representative of 9 43 and four tens.

So we're seeing an increase
and then the next month.

Further out November, we can see
to dip closing price is 9 45.

And then in January of 2018, it's 9 52.

So this is a typical carrying charge
market, nothing fancy about it doesn't

mean that we can't find bull bull
markets in an environment like this.

It just means that the likelihood of
a parabolic move or a rapid increase

aggressive repricing of the commodity
is far less likely to occur than that.

Of if it had a.

Now looking at a market
that has a premium in it.

We're looking at the feeder cattle here.

Again, bar chart, con.com.

We can see the cash market listed
first and the nearby contract at

the time of this presentation is
August, 2000 seventeens feeder

cattle and its closing price.

If it were closing,
prices would be 1 54 0.8.

And the next month out would be
September, 2017, feeder cattle

with its price of 1 54 0.125.

So the nearby contract is selling
at a higher price, not much, but

it's selling at a higher price.

So therefore we have premium.

Now, the way you look for whether
there's a strong, premium, or a

really, um, significant premium is
you want to go out to the next month.

Beyond the next month out.

So now what you want to
look at the next few months?

So for August, yes, there is a premium
based on the price that's seen in

September, but in October we have it
cheaper even still at 1 52 point 77 5.

And then in November we have.

Even lower prices at 1 51 0.275, and
then drops off in January down at 1 45.

So there is a premium in
the feeder cattle markets.

And what does this imply?

It means that there is something
fundamentally strong about

that particular commodity.

In other words, the demand is
high and the supply is short.

Okay.

So you've never really heard me talk
about supply and demand because I think.

Way of trading, especially as
it relates to Forex, isn't the

real thing you should be doing.

But there are real supply and
demand factors with commodities

because they're real, tangible
things and people need to eat.

So, like I said, if you'd like
cheeseburgers and steaks, you're

getting it from feeder cattle.

So we're seeing a clear, obvious
premium and that seen by today's.

Being higher than that, of the next month
out and the future months in the future.

So if the price today's nearby
contract is higher than the contract

delivery months that are after
it, in terms of the calendar going

forward, that is a premium market.

This promotes the idea of what is
referred to as a commercial bull market.

That means that the commercials.

Large dominant users and of this
commodity, we'll be looking to take

delivery of it right now immediately
because they have to have it.

And it's a short supply of it.

So if they're willing to pay a premium
price for it now, versus what would be

expected as a carrying charge premium
later on in delivery months, they know

that there's something fundamentally
going on, that they have to get the

delivery of this commodity, right.

So that's what causes
these premiums to build up.

Another example here
is seen in live cattle.

You see the cash market at the top.

The delivery month for
the nearby is June it's.

Closing price would be
representative 1 31 0.2.

And then the next month is
August at 1 24 point 17 five.

And then in October we
can see one 20 point 40.

So again, there's a premium
in the nearby month.

Next out months are
selling at a lower price.

So there's a premium.

Implying that there is a short supply
and the traders or those that are

looking or seeking delivery of the actual
commodity, the actual cattle themselves,

the interest is so strong that they
have to be paying a premium now for

it, because again, the supply is short,
but the demand is exceedingly high.

Okay.

So let's take a look at it at a case.

And this is going to be
done on the cotton market.

And again, as I opened up this
teaching, this is all the delivery

months for cotton and knowing now what
you're supposed to be looking for.

And it's very simple.

I want to ask you a simple question.

Does the cotton market show
us a carrying charge market or

does it show a premium market?

Again, we start by referencing a
nearby contract versus the next one.

There's a premium here.

Okay.

So cotton is selling at a premium.

So now we have the conditions that are
right for a commercial bull market.

Now, what is a commercial bull market?

A bull market is classically seen with
higher highs and higher lows and price

increasing over time, obviously, but
there's two different kinds of bull marks.

One that goes up gradually stair-stepping
higher and higher and higher.

And then there's another type of bull
market that goes parabolic and vertical.

And it does it quickly.

And the amount of speed and magnitude the
move takes place is usually a signature

and hallmark of a premium based rally.

So usually the commodities that
have a premium built in, like we're

discussing here, they have a tendency
to move really quick and a lot of

distance and short amount of time.

Okay.

So we're looking at here.

This is the daily chart of the
nearby contract for cotton or

representative by the July contract.

And I want you to take a look at price.

Obviously, when we look at commodities,
nothing is different in terms

of how I look at price action.

Everything is based on
PDA res premium discount.

Now, when I say premium, When it refers
to commodities, it's the specific pricing

of the nearby to the next month out.

If the nearby contract is selling at a
higher price than the next month, now

that is a premium do not confuse that
with premium and discount PD arrays.

Okay.

In other words, the PDA Ray
matrix, don't get confused by that.

In this particular commodity case
study, we're going to look at the

implementation of the things that I've
already taught you, and now using it with

gauging whether there's institutional
buying with a premium market.

Okay.

So now what we want to do is once
we load up our nearby contract,

we want to develop a spreadsheet.

Okay.

In a spread chart is the difference
plotted between the nearby contract

and the next month out, you do that by
going to bar chart.com and you click on

the little tab in the lower right-hand
corner here to start the spread chart.

And I'm going to do a real quick.

The overview of it.

Once you load your chart up, you go to
the chart type, click to spread chart.

Okay.

And you want to go over to
where it says first symbol.

When I click on that drop down
into your commodity of choice

and we're looking at cotton now.

So we're going to go to the
cotton market tab, click on it.

They want to use the nearby contract
delivery month, and that is July

and that's trading in the year 2007.

And then we're going to go
over to the second symbol.

We're going to be doing a spread between
the nearby to the next month out.

So again, you use cotton and the
next month out is going to be

October and again, trading in 2017.

And this is real important.

Next thing you want to do is click
on this little tab here and make sure

it's to the minus symbol, because
that's going to give you the difference

between a nearby and the next month out.

And this scroll down here a
little bit, click on the draw.

And now we have the cotton spread chart
between the July and October months.

The outcome is what you see here
and the significance of this.

Is the zero line.

Okay.

So anything above the zero line
represents the amount of spread,

but the nearby contract is
trading above the next month out.

Ideally the larger, the spread, the
stronger likelihood of a commercial

bull market or a pair about move.

I want you to take a
look at that spike up.

We saw in may, we're going to
do a little bit of an analysis.

But at that high in may, at its
peak, the July contract was trading

at six point 50 premium higher
than the October delivery contract.

So in other words, for July cotton,
it was six point 50 higher than the

October delivery contract for cotton.

Now, this is an overlay.

And all, I had to create this with
the software package that I created

my videos with, but I did it.

So that way you can see
graphically what it is you're

using this, the spread chart for.

So when we look at price and we
are expecting higher prices, why

would we expect higher prices?

Well, cotton has been going higher
and went into a consolidate.

From January this year, it went
higher than from March, April, may.

It wasn't consolidation,
but it had a premium.

We also saw price trade down
into a bullish order block

in this first half of may.

But I want you to look at the success
of lower lows in that may decline.

We may have made lower lows each candle
each day, but look at the spread line.

The spread line was actually increasing.

Or in this case, diverging
bullishly now it kind of looks

like an indicator, doesn't it?

And it is because it's price.

Remember price will tell
you everything about price.

We don't need to crunch any
numbers and you don't have to do

any kind of acrobatic mathematics.

It's simply an overlay of the spread
of the nearby to the next month out.

So what we do is we want to look for
bullish divergence between price action

of the nearby contract and the spread.

So, yes, it's going to take a little
bit of work on your part to be looking

for these things and studying them.

Do you need an overlay like this?

But I did it.

So that way everyone could see it easily
without any miscommunication at all.

You can see clearly the spread chart
and the nearby July contract for cotton

being overlaid with one another, you
can see the divergence of the spread.

Now what's the significance of that.

That's a bicycle going back
to our July contract of.

We understand that institutional
order flow is going to see bullishness

and we trade down into a previous
down close candle that solve price,

move away from it that same here as
your typical bullish shorter block.

It's also trading down in to the April
high to April low range into a discount.

So the PDA rate matrix for that
range, we're in a discount range.

We're at a bullish order block
in a market cotton showing a pre.

July trading at a higher price than
that, of the next month out October.

So we see lower lows in price action
as we trade into the bullet shorter

block, but we saw the spread diverging
bullishly that is only being shown

when institutions are stepping in
and buying a lot of it quickly.

Massively.

So if you ever see that when a market
has a premium and it's underlying

bullishness, and it's an, a discount
and we trade down into eight discount

array, like a bull shorter block or
close and avoid or fair value gap, or

if we trade below an old low, in this
case, we had that being seen with the.

Last two trading days of April, we
traded below those equal lows that

seen in April around that, uh, 77
point 80 level and price trades

down into the ball, shorter blocks.

So we have a run-on sell stops.

We have a run into a bull shorter block
and we have a, what would otherwise be?

I'm sure if we put a Fibonacci on
it would be optimal trade entry

long at the 79 7 trading level.

I didn't do it, but despite my eye, I
can see that most likely what's happened.

So we're seeing a spread divergence.

This is a bullish spread divergence
between a nearby next month out.

And when we see these indications in
price, it gives us strong, willingness

to support the idea of being a buyer.

So we could be a buyer
at 77 and it moved all.

Get to 87 that's 10 cent move.

1 cent move is $500 a month.

That's a $5,000 move in the course of
less than a week, less than one week.

One contract in cotton
pays out over $5,000.

Now, obviously we have the benefit of
hindsight here, and obviously y'all

know that I have not been trading
commodities for a long, long time.

I've been primarily a four X
trader, but these things are there

every year, every single year.

These are the hallmarks to.

Makes commodity trading fun.

In my opinion, if we can spend
time looking at the dare, I say it

fundamentals of a commodity market.

We can get to a really strong bias
for when we want to be a buyer.

Now, this repeats itself in an
opposite framework when there

is a premium in the marketplace.

If the market makes a higher high.

Say for instance, if cotton trades up to
say 90 cents, you know, goes higher than

87 high we're noting here, but it does.

So with a lower peak in.

That does not promote or S
significant significantly, uh,

confirm institutional buying.

You'd have to take that with a grain
of salt, because just like anything

else, the spread you want to see that
increase with the advancement in price.

So if it's strong in terms of its
premium driven rally, that spread should

be increasing as price rallies up.

So if we'd see a divergence,
bearishly where the spread fix

fails to make a higher high.

With a higher high end price.

That would be an indication that we
would have to look for reasons to

trail our stop loss, or maybe even
some take some profits and wait

for a new bicycle as outlined here.

So now you've been armed with
a wonderful, smart money tool,

and this works in all the.

And if you look at it from a fundamental
standpoint, you will, you always

be trading with the fundamentals.

If you're using a premium based
idea, like we're describing here.

So if you ever had a doubt, whether
or not fundamentals are needed,

in my opinion, they are for.

Because they are tangible, real things.

That's the world's grocery store,
everything that you eat or consume or

need to operate, you know, this world.

Okay.

It's usually in our commodity markets.

So now you have a way of framing,
institutional buying and selling,

and know when they're going to
be doing explosive moves in the

marketplace until next lesson.

I wish you good luck and good trading.