Basic - trading extreme positioning

Introduction:

I want to share a trading approach that has worked fairly well for me of late. I started trading fx in 2008 and was a break even trader for a long time. Back when I started trading, my approach was mostly technical- lot of indicators, volume, fancy systems etc. I lost money some months, I made money some months. Overall, nothing spectacular. I ended the year where i started if not worse.


Approach:

Needless to say a purely technical approach did not work for me. Beginning April of last year, I came across this feature that Forex Factory calls "Positions / Live accounts". The link is here - http://www.forexfactory.com/trades.php

This is a free tool Forex Factory provides to its users. It basically states how many lots are long or short a pair. You can also choose how many traders are long or short a pair. This in my opinion is invaluable information.

Now this is how I trade this information- I start by looking at pairs that have an extreme positioning imbalance. For example, this image is from todays snapshot of positions. You can see that 91 % of lots on Forex Factory are long USD/JPY. Only 9 % lots are short. I start by assumption that most people who trade are wrong and they will lose money. So these 91 % lots are going to lose money. I want to bet against the majority. This is the basic premise of my approach. Now that I have identified the pair and direction i want to trade, i will open Sell orders.

Where to Place orders:

I open 3 orders each order representing 1/3rd of the total size i want to trade at different price levels (dependent on how volatile the pair is). So , in this example, I will sell 1 standard lot each at levels represented by 0.25 % , 0.5 % and 1% of the current price respectively. If USD/JPY trades at 101.40 today, I will have 3 sell orders at below levels -

Order 1 : Sell 100 K at 101.65 (0.25% of current price)
Order 2: Sell 100 K at 101.90 (0.5 % of current price)
Order 3: Sell 100 K at 102.40 (1 % of current price)

Stops and Targets:

I use mental stops based on price action. If I am bearish USD/JPY but it behaves like bullish (goes thru major resistance etc) I will close the positions manually.
For targets, I take off positions at round numbers, like 101, 100.5, 100 etc.

Risk Management:

For any trade, my maximum risk is 5 % of equity in account. So on a 100 K account, I will risk not more than 5, 000.

Results so far:

For the year so far, I had only one losing month (February). For this year, my account is up 56 % .

What to expect from this thread:

I work 12 hours a day. I am in management consulting business and on road 24X7 so I don't get a lot of time to post on FF. I trade a max of 2-3 times a week and most weeks 1-2 times. I will try to post my trades and rationale behind them here but i will not be very frequent.

The only reason I post this thread is that I want to demonstrate that a nontechnical approach can work (and in my case only thing that worked). I hope this can help people struggling with their trading. It will also be nice to hear similar experiences from other traders on FF.

Disclaimers:

I do not have any rights to Forex Factory's trade explorer or position ratio tool. I just use it as a trading decision support tool. All rights belong to Forex Factory. Also, this is not meant to be trading advice for any one. Just my own experiences. SO, trade at your own risk.


Happy trading!

- 5ABI

My Trade Plan for Next week:

I am looking at EURGBP as a potential short.

My levels for Euro GBP are :

Short 1 @ .8050
Short 2 @ .81

Target @ .7950 (initially)

Hmmmm, I have mentioned the same approach in my some of posts but you have to use different levels wisely. I will suggest that you should two or more positioning indicators e.g OANDA open positions ratio and more. It is just suggestion. Wish you good luck.

I do use them too. I wanted to use something that everything has access to on Forex Factory.

Hi Everyone, I am Parihan Christy.. I am trading in Forex since two years... I have joined this forum for gaining my knowledge.. And also willing to share what I know..

Thanks to Forum admin

EURGBP doesn't have an extreme unbalance, does it? 35%?

Billbss is right, why not nzd/usd ? 88% short.

For crosses,like EURGBP, I also look at individual positions in their composition currencies, for instance EURUSD and GBPUSD. The positioning for EURUSD is neutral (50% long & short) but for GBP 78 % of the units are short.

Similar logic for EURONZD and EURCAD. I am extremely bearish on both these pairs. However, since they are not as liquid as EURUSD and USDCAD, NZDUSD etc, I look at ratios on the currency pairs they are derived from to make my decisions.

As far as I know, the traders have more than 50% correct input, the problem is in the MM

Profit is in a correct entrance. MM has nothing to do with it.

Could not agree more. Traders might be right but still end up losing money.

LDFX, NU is on my radar. But at these levels , I will wait for it to retrace to .85-.8550 before loading on longs.

Nice idea but depending on pair, the number of traders showing their trades in FF Trade Explorer is 100-600. I am not sure if it is enough to make conclusions about the whole market...

Hello,
I am not entirely sure I get the idea.
You seem to think that since most traders lose money overall, then if you "against the grain" , you are bound to make money.
Not so sure about that one.
It reminds me of some Baccarat players I know.
For those of you who are not familiar with Baccarat, there are basically two types of bet you can make (excluding the not so common tie) . You can either bet Player or Bank. Anyway, some people I know assume that since almost everyone loses on the long run, if they bet against what is on the layout (against the majority of the active players) at the present moment, they must win on the long run.
Let me assure you that it does not win on the long run. On course, there is the small argument of the small casino advantage. The small casino advantage is just a little more than spread and commissions in Forex. Basically the same %.
So I am not sure about the logic behind this particular method. I certainly hope for you and the rest on this thread that you are right.

Insider

I was not familiar with Baccarat. But its good to know. So, thank you!

You have laid out my idea in a very simplistic manner. It is not that straight forward of course.

So, if 90 % of the folks are short Yen and 10 % are long- you have to dig deeper . Is this because the majority thinks that Yen is overvalued and they want to sell it? Or is it because it has just made a new high and they think it can't go any higher? Value and current price levels are 2 very different things. Yen is strong and it can get stronger. In fact , one of my favorite tools is to buy when a pair makes a new monthly high. Or sell when a pair makes a new monthly low.

There is a reason why the pair is making a monthly high. I do not have time or resources to figure out what that reason are. But for me , it is profitable to go with the momentum. Look around - how many traders have lost money going short Kiwi and Selling Canadian dollar. It is what it is. I am not going to argue against the trend. And I will take an opportunity to bet against what the majority thinks. If the trend is UP and the majority thinks it should go down, I am going to go long.

HI, i do use other order flow information as well from my broker and other sources like COTS report. I included the FF stuff since everyone has access to it, its free and they can relate to it.

That is what I meant. If using reliable data, the idea is good. But trading based on positioning by some hundreds of traders is not safe.

Even if you have reliable data where most of the participants are included, I still find the information hard to trade from.
Currencies are a bit difficult to test because the markets (forex, futures, etc) aren't centralized but look at the COT reports for markets that are more centralized such as livestock, grains, softs, etc... Most participants are using the futures market so 1 centralized market where you can see the positions of large traders (commercials, funds, etc) looking @ the weekly COT reports. I've reviewed the historical charts & the positions of the traders & I find it hard to see any pattern that I think is reliable enough to trade from.

I think one of the problems with just looking at the positions (futures) of large traders is that you don't know how else they're positioned in the same market or other markets.
As an example, if funds were heavy long corn futures contracts you would think they're bullish but what if they had very large bearish options positions that far outweighed the bullish futures contracts they're holding? What if the bullish corn contracts was just 1/2 of a spread where they're short beans & long corn? They're just more bullish corn than beans but not necessarily bullish corn.
JPM has a very heavy short position in silver futures right now(-14,500 contracts) but they've been buying up all the physical silver they can get their hands on so are they really bearish or just using the futures to push prices lower so they can buy more physical @ better prices?

The market will go where it causes most pain to most people.

Understand what your are saying. But i am not talking about institutions and market makers. My approach is different in the sense that my brokers positioning, or Forex Factory positioning is mostly retail traders. I use this information to gauge the likelihood of a major s/r level to hold or break. As an example, lets us say 91 % of the traders are long USDJPY and price is at key support level 101.50. If the level breaks, it most likely trade lower.