Taking the Trader Positioning Data to the Next Level
Posted by John Forman in Collaboration, Forex Trading, Market Analysis, tags: commitment of traders, COT, John Forman, trader positioning data
This is the first in 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. John is the former Content Editor, and current Advisor, for Trade2Win, a trader support web site with over 150,000 members, where he interacts regularly with active traders from across the globe. He is also a regular speaker to college finance student groups and helps finance faculty integrate trading elements in to university course offerings.
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The Commodity Futures Trading Commission (CFTC) produces, on a weekly basis, something known as the Commitment of Traders (COT) report. The COT report breaks down the futures (and options) open interest as of Tuesday each week in terms of what positions are being held by the different categories of traders. Traders have been using this information for many years to see what the smart money (and dumb money) is doing in the markets. (For more information on the COT, including current and historical reports, visit http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm)
Consider the following table and graphic from a recent COT report on the E-Mini S&P 500 futures (courtesy http://www.commitmentoftraders.com).
The chart at the bottom shows the last five weeks worth of raw position figures for Large Speculators (hedge funds, etc.), Commercials (hedgers, etc.), and Small Speculators (retail folks) in terms of how many contracts they are long and short, and the relative balance between the two (the “Bullish” column indicates the % of outstanding contracts that are longs). If we look at the Small Spec section, we can see that as of August 25th the group was 55% long, but in the intervening weeks they have become more and more negative to the point of now being 57% short (100% – 43%).
On the graph we can see the positioning of all three groups in the bars, plus the cumulative open interest plotted as the line (right scale). What is plotted for the positions is the net long or short. So for example, the most recent blue bar representing the Large Specs is at +113,761. That’s 420,038 long contracts minus 306,277 short contracts. The taller the bar the larger the net difference between longs and shorts.
Why is this information useful?
Because even at just the top level of analysis it can tell you when interest is moving in and out of a market. The greater the total open interest, the more participation there is. Drilling down a bit further, the more group-specific data can be very useful in tipping off potential turning points.
For example, at least over the last few years (and potentially further back), the Small Specs have been wrong about the direction of the S&P 500, as a group, most of the time. We need only to look at the graph above to see how the yellow bars representing the positioning of Small Specs have been negative almost exclusively since late January. They were at their most negative right about the time the stock market bottomed out in March and aside from a little blip they have stayed net short all through the big rally.
In other words, it’s not a precise thing, but watching the positioning of Small Specs in the E-mini S&P 500 futures can tell you a lot about where the market is going, namely, in the opposite direction of how they are positioned. This may sound cynical and mean, but that’s what the data indicates.
If we look at the COT data for the British Pound futures (equivalent to GBP/USD) we can see the Small Specs struggle to get it right there too. They were long the pound during the latter part of 2008 and into April of 2009 when the market was putting in its lows, then got short just before it took off to the upside. Most recently, the Small Specs got long just as GBP/USD started its big drop.
Taking it to the next level with Social Indicators
One of the items in development at Currensee is what’s known as Social Indicators (SIs). This is information based on the trading patterns and positioning of the members of the Currensee network of traders. Basically, we are talking about what in COT terms would be considered Small Specs. As we’ve seen already, knowing what the trading collective is up to can be valuable information. The SIs, though, go much deeper that just net position information.
Think of it like being able to drill down within the COT data and seeing how people trading different timeframes and styles are positioned. And think of it as being able to see what the proven successful traders are doing as opposed to those who have yet to establish a positive performance record.
You can see how there might be some value of that info, right?
In the weeks and months to come there will be a lot of work done on the SIs to see how the patterns present themselves – to understand the data and how it can be used. As more and more traders become part of the community we anticipate the SIs will be able to present an increasingly useful set of metrics upon which decisions can be made.
Keep watch for further updates in the weeks to come.
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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.
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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.
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[...] 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 [...]
[...] in this currency pair. This is one area that Currensee has an outright advantage over the Commitment of Traders report (COT). The COT only breaks it down by Yen positions, not by Yen pairs such as USD/JPY, [...]