Disliked{quote} How do you come to this conclusion or measure this? The talk has been how crowded the Long USD trade is? Just curious....great post by the way.Ignored
- Price action tells you a lot about positioning - in general, market participants on the institutional side are trend / momentum followers so that gives you the first glimpse. Then you just watch PX, how it ticks and how the price reacts to events - as a general rule, if there is an event that's supposedly bullish, market rallies but reverses and starts dropping very quickly after, that's a good sign that the event was well priced in / expected and most traders are already long. Most of the time, the market "smells" the event (whatever it might be - economic data, political news / decisions, CB meetings / speeches) even before there are first signs of it happening - then the market move usually happens going into the event as its probability keeps increasing. After that you often get a reversal on the actual event taking place - people call this "buy the rumour, sell the fact". Maybe that's also why it usually pays off to do the opposite of whatever is on the cover of The Economist, Forbes, and co.
- I talk to other traders / analysts / strategists to check their opinions, as a basic rule - if too many of them are thinking the same way I just get more careful about potential for a counter-trend squeeze. Also there are different positioning surveys done by most of the banks as they ask all their clients in hedge funds / real money funds.
- It is very important to know how / when to use this positioning information / hunch, because sometimes it is completely irrelevant. Different market participants have completely different trade horizons - for example many times it happens that the positioning of one market segment (e.g. large asset managers - longer term guys) is the opposite to the positioning of another market segment (e.g. fast money hedge funds / bank traders / prop shop traders). Longer term money is harder to get squeezed as you need larger moves for these guys to feel the mark to market pain and you also need a lot of new information / news / data to convince them they have a bad trade on. That is why these squeezes can last for days / weeks once they kick in. On the other hand faster type money that punts around a lot (some HF guys, bank traders etc.) is much easier to squeeze, especially if they (as a group on average - for example when chasing a move after an event) get a position on at a bad level.
To give you an example for the current market environment, let's look at USD -> we've been in a decent downtrend (i.e. EURUSD higher) all of 2017 and pretty much most of the risk takers have been participating in that move having short USD bias most of the time (both longer term and shorter term money). This year, the turn for stronger USD has been completely missed by the longer term community and all these guys are still quite bearish USD with a long term horizon (the narrative is that you are approaching neutral rate / end of the hiking cycle, you are in late cycle economy wise and the country is running a double deficit - fiscal and current account). I think for these guys, you really need to break below 1.12 on EURUSD or so, to give up and change their bias for stronger USD. On the other side, faster money like hedge fund guys, bank traders, quant funds like CTA have all been trading USD on the long side since April / May this year. These guys have much less ability to hold on to their views and tend to stop out quicker if the market starts going against them - this is what happened into month end of October, short term community was pushing USD higher into month-end rebalancing (you can check my other posts in other threads where I explained it) but they got overcrowded (which is why I was reducing my EURUSD shorts yesterday and the day before) hence you are getting this huge squeeze today - you can feel by price action that it is positioning driven because PX remains incredibly bid with no pullbacks and any consolidation / correction is flat / sideways.