Retail Positioning - The Ultimate Contrarian Indicator

Why is it important?

Crowds move markets and at major market turning points, the crowds are almost always wrong. When crowd sentiment is overwhelmingly positive or overwhelmingly negative ? it's a signal that the trend is exhausted and the market is ready to move powerfully in the opposite direction. Sentiment has long been a tool used by equity, futures, and options traders.
-FXCM analyst Jaime Saettele

Retail positioning can be used with news trading, scalping, elliot waves, and swing trading.

You can see in the image below how retail positions increased as price decreased. This is a common occurrence in trending markets as retail traders try to pick bottoms and larger funds pick their stops.


How to trade positioning information:
The strategy below was published in 'Sentiment In The FOREX Market' by Jamie Saettele.

 

1. Retail Sentiment is a contrarian indicator during trending markets.
2. The flipping of the ratio is a more accurate signal of a turn in price than extreme positioning.
3. The Retail Sentiment confirms the price action during range bound markets.
4. Retail Sentiment moves inversely to price.
5. Follow the slope of the Retail Sentiment ; a change in the slope means a change in trend.
6. The other way of looking at speculative positioning is to look at the percentage of open orders that are long.
7. Net positioning=long orders+short orders.
8. More than 50% favors weakness.
9. Less than 50% favors strength.
10. Higher net positioning means that more traders are entering the market.
11. Higher net positioning suggests more confidence in the direction of the current trend.
12. Many times a significant increase in net positioning precedes a bull market because many of the traders who entered the market are leaving their stop losses just above the current price action.
13. Lower net positioning means that more discouraged traders are leaving the market.
14. Rising prices and a big fall in net positioning is bearish because short covering is fueling the current trend. When the short covering has ended, prices will likely decline.
15. Lower net positioning suggests profit taking and hence consolidation.
16. Lower net positioning suggests higher risk aversion.

+1.78 means 1.78 buyers for every seller
-1.78 means 1.78 sellers for every buyer

USDCHF: 1.97 slowly increasing all week
EURUSD: 1.36, peaked for wk on Tuesday as bottom pickers bought into the price drop
AUDUSD: 1.02 fairly steady, peaked wed at 1.26 as traders bought into the price drop
GBPUSD: 1.269, very slight increase over week as price had steady decline
USDCAD: 1.83, steady decline over 2 weeks (3.02 on 3/11), and price trend up since 3/17
USDJPY: 1.269, week started at 1.698 and decline as price shot up
EURJPY: 1.698, up form week start of 1.57, price increasing

Euro Sinks to 10-Month Low Against Dollar
Nicholas Hastings. Wall Street Journal (Online). New York, N.Y.: Mar 24, 2010.

These types of very negative headlines are a good indication that a reversal is imminent.

A story (especially one about the value of a currency) is not considered newsworthy to a major magazine unless the public is obsessed with the story, and an obsessed public defines extreme sentiment. Since sentiment extremes accompany market turns, by association, major magazine covers are contrarian indicators and signal market turns.

The idea that magazine covers can be used as contrarian indicators in financial markets is not new. Paul Montgomery of Universal Economics has studied the covers of major news magazines for years and found that when a magazine’s cover takes a directional stand on the stock market, that market usually forms a significant top (if the cover is bullish) or bottom (if the cover is bearish). The same concept can be applied to the foreign market.

Something to that. In June or July of the 2006 Time Magazine cover was how great the housing market is. I believe the official TOP of the housing boom was the month that cover came out.

Most people are symbol illiterate, so they don't understand the images being shown are being shown to those that can read the meaning of the pictures.

So many things are 'hidden in plain view'.

Take the red pill!

Bigger Picture Wave Count on USDX : 4th wave correction to 38.2% retracement
http://i260.photobucket.com/albums/i...7E54/image.png

WSJ publishes article stating how weak the Euro is.
http://i260.photobucket.com/albums/i...54/image_3.png

Traders are beginning to bottom pick, adding to losing positions.
http://i260.photobucket.com/albums/i...54/image_4.png

The great trader, Ed Seykota, has a collection that runs back decades that show exactly this. When everyone and their brother is buying, it's time to sell it.

USDCHF: 2:1 2 buyers for every 1 seller, this has declined from an earlier reading today of 2.26. I am watching the UsdChf carefully for this ratio to increase as price moves to new lows.
EURUSD: 1:1 This ratio is flat. There are an even number of buyers and seller.
AUDUSD: 1:1 The big mover for the day. This ratio has gone down today from 1.3 as retail traders have taken profits as the price has moved up.
GBPUSD: 1.18:1 Overall choppy price action. No significant support / resistance levels have inspired traders to increase their positioning at this time

hi rpmfxtrader,
good thread, I'm following along.

AU Retail Sales measures the value of sales at the retail level. A rising trend has a positive effect on the nation's currency because Retail Sales make up a large portion of consumer spending, which is a major driver of the economy and has a sizable impact on GDP. Traders pay close attention to Retail Sales because it is usually the first significant indicator of the month that relates to consumer behavior and is susceptible to surprises.

Forecast: .3

A negative deviation of .9 should move the market -40 to -70 pips
A positive deviatioin of 1.1 should move the market +40 to 70 pips
A negative deviation of .5 should move the market -30 to -50 pips
A positive deviatioin of .5 should move the market +30 to 50 pips

A 100% retracement is common in the following 3 hours. If no conflicts this entry should be good for 60-150 pips.

Retal positioning stands at -1.1 as there are 1.1 sellers for every 1 buyer. This ratio has gone down from 1.28 as traders have taken profits after the 400 pip move from march 26th. For live retail positioning information - see additional charts here (http://rpmfx.blogspot.com/2010/03/advanced-live-charts.html).

The retail positioning ratio signifies that if there is a + deviation > .9 and price breaks .9215 sell stops will be hit and price will continue higher.

If you are patient and apply this knowledge correctly you can actually become one of the 5%. One of the greatest market ineff.

lasvahgoose and duesomega this is what i was trying to tell you in the scottyB thread. combine this with some prop. level volume and dom, you will become one with the market, OH and no matter what go with the daily trend or dont trade.

Hi mate,

Very nice thread..

Keep up the good work

GeppyG

Thanks for the feedback.

Volume is a great idea. I was actually thinking about writing software to get and display futures volume on MT charts.

The Institute of Supply Management (ISM) Manufacturing Index measures the activity level of purchasing managers in the manufacturing sector, with a reading above 50 indicating expansion. A rising trend has a positive effect on the nation's currency. To produce the index, purchasing managers are surveyed on a number of subjects including employment, production, new orders, supplier deliveries, and inventories.

Forecast: 57

UsdJpy should react in the most predictable manner.
A negative deviation of 3.4 should move the market -40 to -90 pips
A positive deviation of 2.4 should move the market +30 to 50 pips

A negative deviation of 3.4 should move the market -40 to -90 pips
A positive deviation of 2.4 should move the market +30 to 50 pips

A 50% retracement is common in the following 3 hours. If no conflicts this entry should be good for 100% of the initial reaction.

Retail positioning stands at 1.1 as there are 1.1 buyers for every 1 seller. For live retail positioning information - click here. (http://[url]http://rpmfx.blogspot.com/2010/03/advanced-live-charts.html)

The retail positioning ratio signifies that if there is a - deviation > -3.4 and price breaks 92.7 stops will be hit and price will continue lower.

Hi there, that would be a great idea. let us know how it goes.

What is difference between RPM indicator and FXCM's SSI?

SSI and RPM are both sentiment gauges. Their sources of data and update frequency are very different, however they can be traded in the same way. RPM buyer/seller ratio comes from various large source and fed through an algorithm I've developed. It's not a normal metatrader indicator. Metatrader is only used to display the compiled information.

Measures the change in number of employed people during the previous month, excluding the farming industry.

Forecast: 185

UsdJpy should react in the most predictable manner.
Unemployment rate deviation of > .2 should also be watched along side of NFP.

NFP:
A +- deviation of 50 should move the market -60 to -120 pips
A +- deviation of 90 should move the market +60 to 120 pips

The market has been very sensitive to this number as of lately. In the last 5 years this has been the number to watch. One of my least fav. economic releases because of its mainstream popularity.

If there is a conflict between the NFP and umeployement watch for a quick spike and restracement in the UsdJpy.

Retail positioning stands at 1.1 as there are 1.1 buyers for every 1 seller. For live retail positioning information - click here (http://rpmfx.blogspot.com/2010/03/advanced-live-charts.html).

The retail positioning ratio signifies that if there is a - deviation > -50 and price breaks 92.7 stops will be hit and price will continue lower.

RPM shows traders have been adding to long UsdCad positions while price is falling. Stops likely rest below the low of April 1st. If stops are triggered at this level, price will fall quickly. Live RPM buy/sell ratio charts avail here. SSI DailyFx positioning agrees.

http://i260.photobucket.com/albums/i...17B3/image.png

http://i260.photobucket.com/albums/i...ge_thumb_3.png

The AUD Interest Rate Decision contains the outcome of their decision on interest rates and commentary about the economic conditions that influenced their decision. Most importantly, it projects the economic outlook and offers clues on the outcome of future rate decisions.

Forecast: .25 hike to 3.25%
A negative deviation of .25 (no hike) should move the market -45 to -90 pips

A positive deviation of .25 (.5 hike) should move the market +45 to 90 pips

There has been chatter of no hike due to deteriorating market conditions in Australia. Therefore, a 0 deviation or .25 hike as expected may create an initial spike.

Retracements are not common, unless there is an accompanying statment following the interest rate decision that conflicts with the release deviation.

Retail positioning stands at -1.1 as there are 1.1 sellers for every 1 buyer. For live retail positioning information - click here (http://rpmfx.blogspot.com/2010/03/advanced-live-charts.html).

The retail positioning ratio signifies a nearly equal number of buyers to sellers and a positive or negative deviation will have the same effect.