This is one of an occasional series of guest posts by John Forman, Senior Foreign Exchange Analyst for the IFR Markets group of Thomson Reuters and author of The Essentials of Trading. John is a 20+ year veteran of the financial markets. He holds an MBA from the University of Maryland and a BS from the University of Rhode Island, both concentrating in Finance.
I mentioned the Commitment of Traders data previously in terms of its usefulness for tracking the positions market participants are carrying in the futures market (see Taking the Trader Positioning Data to the Next Level). The action in the British Pound of late provides a pretty impressive example of how you could have seen ahead of time the prospects for a big reversal were you tracking the COT figures.
Take a look at how short the big traders had gotten in BP futures.
Notice in particular the Bullish column under Large Speculators. See how as of October 13th that group was 88% short (100%-12%). That's a massively lopsided market. When a market is so imbalanced like that it sets up for some real volatility when things start going in the other direction. We've seen that this week in GBP/USD.
GBP/USD rallied from about 1.5850 to almost 1.6650 in 7 trading days. That's nearly 800 pips and a great deal of the action, especial the October 15th rocket ride, was the result of short stops being tripped. Basically, we saw a short squeeze in sterling. Had you been watching how short the big players were getting as per the COT figures you could have at least been alerted to the potential for something like this happening and strategized for it.
Currensee Social Indicators
Now the big drawback to the COT data is that it is reported only weekly as of the previous Tuesday. That means the data is several days old by the time we can view it. We had another tip-off, though. Take a look at what happened in the positioning of Currensee members.
The data at right shows the percentage of position volume held by members in long positions. Notice how they started October 13 (the same day as the COT data reported above) very long and by the end of it had gotten quite short.
In other words, the Currensee membership traded the market exactly wrong on net. October 13 was a bullish reversal day. It made a new low early then turned to finish higher. That means the members were long and wrong early, then got increasingly short as the market moved higher.
The argument against using futures data in the Forex market, and one that will naturally extend to the growing Currensee data, is how it only represents a relatively small portion of the market (the above open interest figures amount to only about 7bln GBP, which is only a fraction of the whole GBP/USD action - daily). Still, you use the tools and information available to you, and no position data should ever be ignored even if it’s just a sample. When the Currensee data on retail trader positions is added to the prior week's COT figures showing a very short positioning among the Large Specs we have a situation where one could see things lining up for a meaningful turn higher going against the retail folks and riding short stops by the bigger players.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.