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  • #134,601
  • May 4, 2015 12:04pm May 4, 2015 12:04pm
As gator often points out, most retail was short @ 1.39+

http://www.forexfactory.com/showthre...95#post8130195
  • #134,602
  • May 4, 2015 12:27pm May 4, 2015 12:27pm
@Shunyi: Oanda labs. A simple model for causality is the following: Small traders supply liquidity to the large traders. Forex is close to a zero sum game. If you look at sentiment at short timescales, the usual M and W patterns seem to do the trick of confusing the retail... If the causality goes the other way, the retail are just spectacularly and consistently bad at deciding direction. Whatever it is, I am happy with it.

@Pharm0r: Sampling could be the problem here. On FF the data is assembled over couple of hundred lots of positions. It is an order of magnitude more on Myfxbook, and likely at least an order of magnitude more on Oanda... The Oanda data seem to show the expected behaviour for 1.3xxx, I do not have the data for 1.5xxx.

k
  • #134,603
  • May 4, 2015 2:09pm May 4, 2015 2:09pm
Quoting USD-Bear
{quote} hi kprsa, while I respect your opinion of being a contrarian to small traders, it can never ever be the dominating reason for taking/holding a position. Just staying/going long because 50% of small traders are not, seems a too simple tactic I certainly wouldn't take.

the interpretation of such data is far more tricky.

Retail traders have a very good nose for the extreme turning points oftentimes.

The crux with most of them is, that they are quick to take the first gains and then position over a prelonged period of time against the new main trend.

So the gains are getting quickly erased.


Gator is right when he said, that the retail crowd was net-short when price turned at 399x. But when I remember correctly, most here in FF were long, and were still advocating prices far beyond of 1.4 after the initial 500 pips drop.

maybe we have a negative feedback loop here in FF LOL



Here are three sources where you can see the positioning in Mai 2014

They are FXCM, Saxo and Oanda

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So now let us look finally on the COT report and figure out what the Specs (Small Speculators) have done:


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the retail crowd was indeed net-short at the 399x high. As you can see in the period before, they tried to position for this down-turn since Jan 2013 and missed in this way the 1000 pips ralley.

But finally they got it right.

While price decreased, the retail crowed increased their short holdings. At the bottom they covered their short positions only marginally.

May be a recipe for disaster at the moment.

The sentiment indicator at the bottom is a bit misleading. Here they have looked at small spec positioning in order to derive sentiment.

At this chart the sentiment looks very bearish, which in turn is a good indicator for contrarian play. And as we have just witnessed in the weeks before, it is a good contrarian play.


There are other sentiment indicators available:


One is the Daily Sentiment Index (DSI), another, for example, is the weekly survey by animusX.de. Both ask traders a lot of questions in order to determine sentiment.

Both of them right now show, that the retail crowd has changed their sentiment from record bearish (it was nearly 98% bearish at the low) to now over 60% bullish. Alone in the last week the sentiment rose from around 30% to 64%.

When I look at the huge short position the crowd holds, they might get even more panic-bullish when price moves towards 1320 or extended into the 1400 to 1500 range. Than they will eventually cover their shorts and go heavily long.
  • #134,604
  • Edited 2:45pm May 4, 2015 2:13pm | Edited 2:45pm
Thanks for this great post. I'm going to take your excellent advice about marking up a chart with fundies the way you do, even though I don't agree with some of your viewpoints.

About the stock market, I would agree that it's a discounting mechanism, and that expectations are what is traded. (Where I disagree is that I think the stock market is trading expectations about future of the business cycle, and the Fed is REACTING to the business cycle, and further that they react differently when the business cycle is turning up than they do when it stumbling. That is, when the data show that the economy is improving they start gradually raising the rates, and when they think it's stumbling they start lowering them - which is why when they start lowering rates it's time to get out, not in - the converse of the conventional wisdom that says that when interest rates fall stocks rise, then it's time to get in. I'd further argue that they tend to err on the side of caution, and that they are even more cautious about not squelching a recovery than they are about putting a damper on an overheated economy, which is why you may be later entering than you should be if you do it based on the Fed raising rates (or even talking about raising them - take this cycle for example) rather than the charts and the economic data, and you are better off if you exit based on the Fed rates going flat and then being lowered rather than waiting for the charts to show the classic lower high and lower low.

(What bothers me is that this cycle looks a lot different on the charts than the previous two, and I can think of a few reasons why that is.)

About exchange rates, I just don't think you can make that argument, because there are too many other factors at work. For example, look at the Fed/DXY chart starting at 6.81. Fed rates peak at 19% !!!!!!! in 6.81 and start tanking while the DXY carries on climbing with only a minor stumble until 4.85 - nearly 4 years. So one can hardly say that the big boys anticipating the Fed and taking the meat of the move was responsible for that. (You'd be a lot better off arguing that that rise was the effect of the pound being almost completely phased out of its role as a reserve currency in the late 70's which accelerated after Nixon scrapped Bretton Woods, and created demand for dollars, as the dollar took its place, and that that was what the big boys were anticipating, beginning in the mid 70s.).

And then you have 3-2008 to 3-2009 where the Fed continues dropping rates like a ton of bricks for an entire year straight to the bottom and the DXY skyrockets. (That, of course, was the risk-off trade and not the big boys anticipating the next Fed interest rate rise, which has yet to come, by six years .) And then, of course, in a given currency pair, sometimes it's a case of which of the two sisters is the ugliest, as Cloggie used to say.

So I think that therefore we can't say that if the markets expect interest rates to rise (based on data, jawboning, whatever) then we can automatically expect the base currency to get stronger. Sometimes it does, and sometimes it doesn't, and that is the point I was trying to make with those charts. Which isn't to say that I don't think fundamentals affect exchange rates, because of course they do, but it's a questions of which ones are causing the move at any given moment.

Quoting sisse
{quote}{quote} ...well to wrap up the last post... 2. From a trading point of view The only and KEY problem with those charts is that you are analysing the correlation in a linear and STATIC correlation. When TRADING (FUNDAMENTALS or MACRO MOVES) we TRADE EXPECTATIONS NOT FACTS. It can be STOCKS or FOREX or anything, We want to buy/sell the future forecast VALUE buying lower/selling higher. We buy/sell PRESENT value with the EXPECTATION of a Higher/lower FUTURE VALUE. By the time the ACTUAL FACTS, call it Earnings, valuations, merger, R&D, bankruptcies,...
  • #134,605
  • May 4, 2015 2:18pm May 4, 2015 2:18pm
Quoting infinitus
{quote} the interpretation of such data is far more tricky. Retail traders have a very good nose for the extreme turning points oftentimes. The crux with most of them is, that they are quick to take the first gains and then position over a prelonged period of time against the new main trend. So the gains are getting quickly erased. Gator is right when he said, that the retail crowd was net-short when price turned at 399x. But when I remember correctly, most here in FF were long, and were still advocating prices far beyond of 1.4 after the initial...
hello i agree with you mate but, shouldnt we consider the definition of short peroid for most traders so it might still be good as short for som and long for som with Fair SL ,i do totaly agree but just want to make my views more clear
Let me fill my acount wallet then will take Ur advice
  • #134,606
  • May 4, 2015 2:43pm May 4, 2015 2:43pm
Quoting infinitus
{quote}they are quick to take the first gains and then position over a prelonged period of time against the new main trend..
This is precisely the small traders' irrationality that I was mentioning. Rational behaviour would be when the sentiment follows the price, if the price is increasing, more traders should go long and vice versa. Irrational behaviour is when the price is rising, more and more traders are going short. That is where one needs to be contrarian.

k
  • #134,607
  • May 4, 2015 3:00pm May 4, 2015 3:00pm
Quoting infinitus
{quote} What do you think after seeing this all? When I read FF, I still think that people think that it is a given, that price will simply follow the rate differentials. Some say it will at least follow after a while. So what do we make of this? How do we define this time? How much drawdown can people withstand? Are we able to formulate an universal trading advice? I think not. {image}
I agree with you. Very well put and much better and more succinctly than I did (except for the an, if you'll excuse the grammar police.)
  • #134,608
  • May 4, 2015 3:07pm May 4, 2015 3:07pm
Quoting sisse
{quote}{quote} ...well to wrap up the last post... 2. From a trading point of view The only and KEY problem with those charts is that you are analysing the correlation in a linear and STATIC correlation. When TRADING (FUNDAMENTALS or MACRO MOVES) we TRADE EXPECTATIONS NOT FACTS. It can be STOCKS or FOREX or anything, We want to buy/sell the future forecast VALUE buying lower/selling higher. We buy/sell PRESENT value with the EXPECTATION of a Higher/lower FUTURE VALUE. By the time the ACTUAL FACTS, call it Earnings, valuations, merger, R&D, bankruptcies,...

Hi Sesse, hi Misspips,


I have reared the whole thread of arguments and came to the conclusion, that we are exactly on the same page:


Argument is/was, that the typical rate-correlation play is only what it is: a meme.

When I set up my first postings to this theme weeks ago, it was clear by reading the threads, that many traders here believed (or were told) to look at the rate differentials and trade them accordingly. (look at chart, spot rate differentials and trade). That is the point

Clearly, as we can see from all the analysis provided, the post-hoc analysis came to the result that the correlation play is a non-starter most of the time.




So there must be another way to trade this eventually successful.


Misspips will trade only short to very short term, so she is not really effected.

I try to assess the situation via Elliottwaves (a visualization of social mood) and other sentiment measurements (like sentiment surveys, COT and TIFF data etc.)

And Sisse tries to analyse the correlation via econometric regression. And when I understand him correctly, that is in this case (as in many others, or all) EXPECTATIONS. He does not trade the correlation chart, because as he stated, most news is most of the time already digested, when the news materializes in the markets (like rate hikes). From an EMT view it makes sense.



So I can not understand, why Sisse thinks, that Misspips or me are wrong. Both of us warned not to trade the correlation charts but to apply other measurements.


But what bothers me is, that Expectations-trade may also fail miserably from time to time. Let me explain:



E.g.: we have an FOMC meeting and it gets clear, that the rates are to hike in December.

Theory would now be:

when will the smart and ruling money make their moves? We can wait for them to do so, or wait and follow them.


So the smart money guys make the macroeconomic assessments, also their econometric regressions etc. and try to come to a result and action accordingly.

The smart money is thought to be the large traders/speculators in the COT report. The comms or Swap dealers will do what they are expected to do: they will hedge.

So the large trader/large speculator move the market.



But looking at many COT reports, one can find ample evidence, where the majority part (the net) of the informed, the smart, the huge money was plain wrong for a longer time, missed important swings or were generally late to the party.

How can this be? Are some more informed than others (tin foil hat on) or is the smart money crowd (as any other crowed, too) also an inhomogeneous group (tin foil hat off)?

So what make us so sure, when we trade Sisse style, that we watch the right people at the right time, with their right decissions? I am not saying that Sisse's method does not work (who am I to dare?), but for me it seems, that the subject is far more complex than it seems to be or is told............


Respectfully,


Markus
  • #134,609
  • May 4, 2015 3:25pm May 4, 2015 3:25pm
Quoting MissPips
Thanks for this great post. I'm going to take your excellent advice about marking up a chart with fundies the way you do, even though I don't agree with some of your viewpoints. About the stock market, I would agree that it's a discounting mechanism, and that expectations are what is traded. (Where I disagree is that I think the stock market is trading expectations about future of the business cycle, and the Fed is REACTING to the business cycle, and further that they react differently when the business cycle is turning up than they do when it stumbling....

Again great post and I can agree fully.

For me it is hard to imagine, that one is able to draw trade decisions by doing fundamental analysis. Especially in Forex markets.

Looking at the ever changing world, which gets ever more interconnected, no one is really able to judge the outcome, when some adjusting screws are modified at the left side of the motor, at the same time a few at the right side, the top and the bottom of the motor.

Looking at the economic calenders day in day out, and you get an understanding of the complexity of this adjusting screws.


What is especially intriguing is the fact, that even the best payed economists can not agree on one same topic often enough. Look at the consensus estimates of GDP, EPS estimates for the stock market and many more.

Maybe it is only me and my limited brain. But for me it is too much entropy.
  • #134,610
  • May 4, 2015 3:27pm May 4, 2015 3:27pm
Quoting rafat habeb
{quote} hello i agree with you mate but, shouldnt we consider the definition of short peroid for most traders so it might still be good as short for som and long for som with Fair SL ,i do totaly agree but just want to make my views more clear

agree, but data shows, that most/many retail traders get married to their LOSING positions
  • #134,611
  • May 4, 2015 3:31pm May 4, 2015 3:31pm
Quoting kprsa
{quote} This is precisely the small traders' irrationality that I was mentioning. Rational behaviour would be when the sentiment follows the price, if the price is increasing, more traders should go long and vice versa. Irrational behaviour is when the price is rising, more and more traders are going short. That is where one needs to be contrarian. k

Yes, exactly.


Same as for retail traders applies also often enough for the large traders/informed money/smart money. They are simply momentum generating trend following traders. At the start of a new trend they are positioned completely wrong, even so at the end of the trend.

What makes them survive seems to be the fact, that they have the deeper pockets and low leverage
  • #134,612
  • May 4, 2015 3:32pm May 4, 2015 3:32pm
Quoting MissPips
{quote} I agree with you. Very well put and much better and more succinctly than I did (except for the an, if you'll excuse the grammar police.)

I can need all the spelling/grammar help I can get

It is welcomed
  • #134,613
  • Edited May 5, 2015 12:04am May 4, 2015 3:48pm | Edited May 5, 2015 12:04am
Quoting Mr Hatch
Hm... just a thought on the dxy-interest-rate-chart. The world (with respect to interest) has changed dramatically. While in the past, the differentials might have been bigger/smaller, rates are now equally low with a few exceptions. That basically excludes any "non-reaction", any delay in responsiveness or any contradictory outcome.
Good point. What's bothering me is that the charts for this cycle don't look the way they have in the past, and I can think of a lot of good reasons for why that is. I agree with Gator that this is a global reset period, the likes of which we haven't seen for 40 years, or more.

What is different about this period is that :

1) interest rates have been much lower now for much longer than they ever have been

2) an unprecedented amount of money has been injected into the financial system

3) This is the first time (compared to the 3 previous business cycles) that the Fed didn't start raising rates when/near a higher low, higher high on the charts. (This, of course is because the stock market isn't what the Fed watches. It watches the data (FRED and so on). And even after this long period of low interest rates and QE, the economic data improved very very slowly, even though the market skyrocketed.

4) The reason for this, imho, is that this is the first such cycle where:

a) the impact of globalization on the US jobs market was fully felt. That is why companies results could improve, while the corresponding effect on the US job market was relatively weak, compared to the previous recoveries and compared to the financial measures taken

b) the magicians were fresh out of rabbits (87 to 90s - demographics - not a bubble - boomers hit their stride and generated huge real growth, 2000 -dot.com bubble - been there done that. 2008 housing bubble - been there done that. No quick fixes left that I can think of.)

5) Jobs have been draining out of the US economy at an increasing pace (and a more serious level - no more 'we think, they sweat') since the mid 70s due to globalization. The Fed/government dealt with this in various ways (see point 4) and one of them, unpleasant as it is to say, was to nominate the US for the job of global policeman. Now you may disagree with how good a job that was, and how good a job the US did of it, and whether it was needed in the first place, but the fact is, that's millions of jobs just in the military alone, and millions more in the related industries and millions more in the related administration (the VA, caring for the disabled, etc). And I think most (not all) of that is going the way of the buggy whips. Now, of course the former buggy whip makers can be a lot more productive doing something else, but that's going to cause a lot of dislocation, and it won't be quick and straightforward.

6) Since TANTASFL applies here, somebody paid for point 5. Who paid? The rest of the world did. How? They bought US debt and used US dollars as their reserve currency, and then, of course, the US printed trillions of dollars and paid them back with deflated dollars. (Thank you, Tricky Dick.) Since the US looks to be giving up (or at least trying to give up) the role of world policeman, there won't be any need for that system anymore, so the US might agree to some other mechanism. And that's going to cause dislocation that hasn't been seen in I don't know how long. (That might depend on other world events and who is elected president - Republicans tend to be a lot more hawkish on defense - but I think that there's a good chance that US is going into one of its isolationist phases.)

7) The reshoring that's going on now because of energy.

All these things are huge changes - the kind of global reset that most people have never seen, and most who were alive during the last one were too young to have been trading even though we may have lived through it. That's what's worrying me about making the standard forecasts using formulas based on what's happened in the past.

Because for one thing, I think the US recovery is going to continue to be less vigorous and straightforward than previous recoveries have been because of all
the factors mentioned above. Even though the reshoring due to energy will work in its favor, that's not a quick fix. Entire industries (and their supply chains, and the opportunities for innovation that you have when you have industries located near supply chain clusters) have been dismantled and it's not that quick a process to rebuild that.
  • #134,614
  • May 4, 2015 3:58pm May 4, 2015 3:58pm
I can honestly say...

After reading as much as I could from Sisse, Misspips and brother Markus...

I'm fucking glad I can read charts...all this other shit just makes me want to sleep.

But...nice to know there is another side of the coin...
Money Can't Buy Happiness. Poverty Can't Buy SHIT! You Choose!
  • #134,615
  • May 4, 2015 4:32pm May 4, 2015 4:32pm
Quoting Magix
I can honestly say... After reading as much as I could from Sisse, Misspips and brother Markus... I'm fucking glad I can read charts...all this other shit just makes me want to sleep. But...nice to know there is another side of the coin...




When your charts become to agitating and you can not sleep, try dreaming of your charts with Elliott-Numbered sheeps. That will help


Sheep A - Sheep B -Sheep C - Sheep 1 - Sheep 2- Sheep 3 - Sheep 4 (holy shit, impulsive sheep - back to trading, wake up)
  • #134,616
  • May 4, 2015 4:38pm May 4, 2015 4:38pm
Quoting Magix
I can honestly say... After reading as much as I could from Sisse, Misspips and brother Markus... I'm fucking glad I can read charts...all this other shit just makes me want to sleep. But...nice to know there is another side of the coin...


The thread went from elementary to college in one page!
  • #134,617
  • May 4, 2015 4:47pm May 4, 2015 4:47pm
Quoting Magix
I can honestly say... After reading as much as I could from Sisse, Misspips and brother Markus... I'm fucking glad I can read charts...all this other shit just makes me want to sleep. But...nice to know there is another side of the coin...
I find it fascinating
"Mrrraggglhlhghghlgh"
  • #134,618
  • May 4, 2015 4:47pm May 4, 2015 4:47pm
Quoting Pharm0r
{quote} The thread went from elementary to college in one page!
no shit, it's Revenge of the Nerds...
"If The Fool persists in his Folly he will become wise." - William Blake
  • #134,619
  • May 4, 2015 5:09pm May 4, 2015 5:09pm
Quoting infinitus
{quote} When your charts become to agitating and you can not sleep, try dreaming of your charts with Elliott-Numbered sheeps. That will help Sheep A - Sheep B -Sheep C - Sheep 1 - Sheep 2- Sheep 3 - Sheep 4 (holy shit, impulsive sheep - back to trading, wake up)
Uhhh...

Maybe you've never been introduced to a couple of modern day advances in sleep therapy...
Cold Beer.
Pr0n.
Rubbing one out.

Pretty easy deal and a lot less to remember in the am.
Money Can't Buy Happiness. Poverty Can't Buy SHIT! You Choose!
  • #134,620
  • May 4, 2015 5:10pm May 4, 2015 5:10pm
Quoting The Fool
{quote} no shit, it's Revenge of the Nerds...


I see Miss Pips, Sisse, and infinitus....who's the 4th?!

Cool info for sure....and mostly above my head.
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