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Trading against the 90% that lose
Trading
against the 90% that lose.
We
often hear figures about the 90% (or even more) that lose money on a consist
basis. It’s a ‘fact’ often quoted by gurus and a common belief held by traders.
The question for professional traders then becomes how do we benefit from this
landslide of people on the wrong side of a trade?
Although
an often discussed subject, how we actually use the ‘90% lose’ fact is not
often approached. In this article we will discuss 2 freely available pieces of
data that with the right analysis and interpretation can provide savvy traders
with a great edge to trade against the 90% that lose.
COT Index
The
Commitment of Traders Data is created by the CFTC - The Commodity Futures
Trading Commission and is published weekly every Friday. This body gathers and
publishes the open futures positions on all publicly traded US futures
contracts as well as the corresponding options.
The
data consists of 3 main categories.
Commercial Traders - These are the bigger players in the markets, the
smart money and consist of large firms that actually use the commodity being traded,
includes companies like…BP in the Oil and Gas Market, Nestle in the Cocoa and Sugar market.
The main function of these traders is to hedge the price of the commodity that
they trade in.
Large Speculators - These consist primarily of commodity fund traders
and are mainly trend following. The position sizes of these traders tends to be
in tandem with the movement of price.
Small Speculators - The little guys, individual traders and small
firms, these are the traders that tend to be wrong in the market at the tops
and bottoms of markets.
COT
data is often misused and misunderstood, in its raw form the COT information
describes the number of contracts long/short held by these groups. For example
the Large traders component may have 56,000 contracts long S&p 500 emini
and 23,000 contracts short. The net position would thus be +33,000
long. Many traders use the net number itself, we feel that this does not
provide enough information. +33,000 sounds bullish, but the key is
where is this number relative to the historical average of each commodity
group.
This
is where the COT Index comes into
play, the construction of the COT Index is nothing more than putting this weeks
net position into a format that will tell you where the current number is in
relation to past numbers over the last 6 months. The point is, if the net
position is the highest it has been over the 6 month period then the COT Index
is 100 and if it is the lowest, then it is 0. Any variation between the two
will constitute its respective relation to the historical average.
How do we use this data? We believe that the COT Index offers a good
indication of market sentiment and future direction. The key is to follow the
smart money (Commercial) and trade against the other 2 groups when they are at
an extreme.
Extremes
in the data are figures below 30.00 and above 70.00. The ideal situation for a
short position is a low reading in the Commercial COT and high readings in the
Large and Small trader numbers. For example the Commercial COT Index
reads 5.97, this means that the net commercial position is strongly biased to
the short side. The Large and Retail (our main contrarian focus) are reading
97.70 and 100.00 respectively, meaning they are the most long side biased they
have been in the last 6 months. For traders this means that their focus should
be on short side trades, the goal is to follow the commercial
traders. This is the ideal alignment of the the groups for optimum
success.
This
scenario has been present in the EURUSD for the last 2 weeks. So we are
expecting some continued short side bias in that pair
Remember
this is longer term view so more swing oriented, however the swing view is also
important for day traders when trying to line up the higher probability
"trend" following trades.
Retail Traders Position Summary
Also
known as the Long-Short ratio this is a tool primarily offered by Forex firms,
we haven’t been able to come across the same data in the futures as yet. The data
is based upon the collective trades and trading direction of many thousands of
retail traders (the average Joe). This group of traders is notoriously wrong at
predicting market direction, market tops and bottoms with some simple analysis
we can look at this data and take a contrarian view, for example if over 70% of
retail traders are long USDJPY this
offers us a short bias. Savvy
traders should then be focusing there energies on short side trades.
It
is the 24th of August 2010 today over the 2 months over 70% of
retail traders have been positioned on the long side of USDJPY the currency has
had a sustained decline in that time, with a major breach of support today.
Our
analysis of the COT Index and Retail Traders Positioning information is now
available as part of the Pivotfarm data sheet. Pivotfarm – The Home of Support and
Resistance Trading
»
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Don;t commercial traders spend a large amount of time hedging their businesses as well though leading this data to be hard to quantify? WHy not just follow the large traders and when the index has a reading of 100, then short?
I got a promo for POMO! LOL!
New rules require exchanges to keep bid w/in (I believe) 125pc of the existing market. Instead of day dreaming why not take the James Simons/Renaissance Tech fast finger excercise course. Running 20,000 bids/second/stock can reap rewards beyond the dreams of your friends and family. Work those digits WORK 'EM
Updated S&P500 chart showing head and shoulders with target.
http://stockmarket618.wordpress.com
THE GAME
http://www.cgarena.com/freestuff/tutorials/photoshop/youcheat/youcheat_l...
Brokers and the exchanges make money, that's it.
I'm expecting some flash crashes in the next few days, so I have put 0.001$ bids on like 76 stocks that are above 20$ :)
I like this guy.