How I Trade Using Sentiment and Positioning Data (Strategy Video)

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well traders it's Wednesday December the

27th this is John kick ladder chief

strategist for daily FX comm here with a

strategy video which I think really

covers one of the most consistent

questions I get during q and A's or even

during Twitter just on an average day

and that often reflects positioning

positioning data is very popular and

there are multiple means of finding it

but the analysis of this positioning

data is not always consistent and that's

not just inconsistency I'm reflecting on

people's different versions of analysis

but rather also in what the data and

positioning data can actually reflect

today is a great example as we see a

significant or at least when I ran my co

2 figures found that there was a

significant reduction in net long Ozzy

speculative positions and was that a

huge short interest that built up

through this past week actually the past

Tuesday when the co 2 figures are run

through the Tuesday of every preceding

week or was this a reflection of a

significant reduction in net long

interest which I think that's the latter

now how you evaluate this translates

into very different implications for

trading so we'll talk a little bit more

about how I personally use sentiment

positioning data in my trading analysis

so first and foremost it's important to

understand that what is reflected in any

market is a cumulative view and

positioning of all its participants

so the sp500 over throughout 2017 was

pretty much in a persistent bull trend

that is ultimately a reflection that the

most participants the most traders

investors etc or at least the greatest

cumulative wealth if you want to be

accurate here are being positioned

towards a long equity or a long SMP 500

exposure okay it's just

the reflection of what we see so if

there are more buyers than sellers

all right the market goes up and again

it's not necessarily the number of

buyers but how much influence they

command an aggregate meaning if we had

20 traders who had $500 accounts and

then we had one trader who had a million

dollar account the million dollar

account trader is going to move the

markets a lot more so it's really a

great impact on a notional basis but we

sum it up as being the number of traders

because the scale of participation

usually balances out but if we wanted to

assess what everyone was thinking in a

market we would look at price and that's

often why technical traders say I don't

deal in fundamentals I only look at

price because it can be interpreted in

many different ways and it's just better

to avoid the over analysis trap or the

misdiagnosis or be drawn down the wrong

road because of inaccurate information

any number of issues that that

absolutely do occur and fundamental

analysis but when we look at price we

see what was important after the fact

that doesn't really help us in

projecting next trend whether that be a

strong extension would that be a strong

reversal whether it be a influx of

volume and volatility or a decrease in

volume of volatility you don't really

get that from technical analysis some

may claim that they can do that but it's

not really what you're going to read and

price action your your expectation is

that in my toolkit of observed time

frames over the past years or decades

that I have a template a example from

the past which I can apply to our

current conditions and that's very

presumptuous because there are many

different instances at different

technical patterns and they don't always

have to be applied at the same time

because well you might be looking at

price and price action after the fact

the underlying themes might be very

different and it won't result in the


and of outcome much like the numerous

false breakouts that we had over the

past few months so if we want to try to

evaluate what the markets are going to

do in advance we look at empirical

evidence to try to establish what a

market will find important into the

future now I say market but there are a

lot of different participants I use an

example of twenty people obviously

that's far far too few when we're

talking about something as a liquid or

liquid as S&P 500 and certainly when we

get up to the scale of something like

the dollar which is enormous ly liquid

to get an assessment of that we need to

know that there are different

participants here and they wield very

different influence depending on their

scale and we'll go from scale from

largest to smallest and the largest have

the biggest impact the smallest have the

least impact all right the largest

central banks then we get into

international banks then we get into

sovereign wealth funds then we get into

hedge funds then we get into very large

traders and then we get to you and me

all right we're the smallest of the

group so we don't impact the market

nearly as substantially aggressively as

on the other end of that scale like

central banks or international banks but

let's take a look a little bit about the

differences on the scales central banks

are very very slow they're also very

transparent which much to the chagrin of

many FX traders who are looking for some

kind of guidance and price action why we

don't have a more material impact from

interest rate expectations

this is Fed Funds futures the implied

rate and yes it's very hawkish yet the

dollar is not rising in observation of

that why because the central bank is

very transparent about what it intends

to do and hence it undermines that price

action so it's very slow they might be

have a ton of money they might be

capable of substantially changing the

direction of the market and the

longer-term trend but you're not going

to get

usually very significant price in events

like big breakouts or imminent reversals

they do happen but they're very few and

far between

if you observe what the central banks

are doing or the international banks are

certain extent sovereign wealth funds

you see more the trend what the

intention is over the longer term and

yes you should watch what they do for a

longer term impact now let's look at the

other end of the scale you and me or

large traders all right

we are opportunistic we look at

something like the pound dollar and we

say I see a range there I see trade

opportunities for back and forth now

that's not really a prolific move if

we'd trade into this range because it

obviously is very tight but for us as a

group trading on leverage looking for

short-term targets this is exactly what

we're looking for we're looking for

opportunity and we're being

opportunistic so we go back and forth

and historically and finance books they

call and they call this providing

liquidity to a market but this is the

kind of training that goes on now we

have measures of interest that can

evaluate what the central banks and

international banks are doing and

sovereign wealth funds and that's good

for establishing longer-term trends we

have measures to see how the short-term

speculators were large traders at the

other end of the curve the smaller

participants are acting and that's going

to be more often considered quote noise

but it's shorter duration more abrupt

movement all right now if you want to

evaluate one type of analysis technique

what do you take away from it you can

say well do I trade long term or short

term trades you do long term trades you

should really pay more attention with

the central banks international banks

and sovereign wealth funds are doing if

you are a shorter term trader you should

pay more attention to what individual

traders retail traders as what they're

also called larger traders often through

futures that's really well measured or

even hedge funds they're really

I consider myself more of a hybrid of

both but most of my trades are on the

shorter end of the scale so I take stock

of what the big picture is and that's

why I pay so much attention to things

like central bank since ye rata my my

regular trade videos but we in terms of

actual trade timetables I get all my

analysis from the shorter duration so I

start paying attention to measures of

sentiment on that shorter scale now

there are very good means for evaluating

what the short term trader is on daily

effects we have the sentiment figures

which come from IG and you get it on

daily effects you also get in daily

effects Plus this is live figures from

how people are exposed or positioned

whether it be through FX or in this case

CFD use for some of these other assets

we get a weekly report down here beneath

the key assets and you can get the

consistent twice a day update here in

daily FX plus but from this we can

actually look at something like the S&P


we'll see how retail traders are

positioned in the SMP 500 you can see

here that they are short by two-thirds

all right two-thirds of the market is

short only 1/3 is long but if we look at

how people were positioned all right you

actually see that despite it being 2/3

in the market short that is still the

most bullish positioning amongst retail

traders that we've seen for the SMP 500

on this scale and this goes back really

only six months but I can tell you with

historical data going back further that

this is still very substantial this is a

significant close to net balanced

position now often times it's billed

individual trader or retail trader

exposure as being wrong I'll tell you

right now it's not always wrong this is

not always a contrarian indicator all

right is the SMP 500 a great short

because people are so it's so close to

being that long or do we reinterpret as

being well it's still very very not sure

people expect us to reverse so we're

just gonna keep on going higher well I

wouldn't take either of those

evaluations why cuz liquidity is the

dominant factor here I think it's very

much gonna stay in a range and if any

breaks arise it's gonna be quickly

snuffed out because there isn't enough

market behind to actually facilitate a

meaningful move there's a lot of retail

traders around perhaps looking at this

trying to take stabs at the market but

you don't have the backing for

persistent trend whether it be a

reversal or continuation so I wouldn't

take either but oftentimes when

liquidity fills back out people might

say well since its net short we should

be long because retail traders are

always wrong retail traders aren't

always wrong retail traders are often

right when it comes to very clear

consistent technical patterns because

most of them follow technicals versus

fundamental analysis when there are

ranges is even more clear so when I find

ranges that I like and that can be a

channel that doesn't have to be

horizontal range but when there's a

range and we're at the top end of the

range and let's say that everyone flips

not short because they're at the top end

of the range I actually think that

that's more accurate because they are

engaging a market according to their

preferred a now a trading approach and

it just so happens to fit the

circumstances of the market so use your

own analysis first and then use

sentiment like a tool not the be-all


no individual indicator or analysis

technique is accurate in and of itself

it has to be used in concert to come to

a better picture okay now another

measure of speculative interest alright

so on the the more speculative and the

scale is large traders for large traders

you can look at measures like the CEO

team alright commitment of traders

report competitors trade report is

released by CFTC this is the commodities

the United States and you have to report

your exposure at a certain timeframe

once every week it's on actually Friday

and it measures up until that that

preceding Tuesday so net speck future

positioning you can actually take

hedging interest you can take corporate

interest there are a number of different

exposures that are measured here I like

to pay attention to the net speculative

interest because it gets down to that

shorter end of the scale that we were

talking about so what we see here is net

spec interest in the Aussie USD and oz

USD itself darker red is the Aussie USD

price action the lighter red is the net

speculative positioning now as you can

see we actually had a very market drop

in that speculative positioning to a

two-year low as of this past week now

this also happens to be the biggest drop

that we've seen since August of 2014

this is the change net change and again

what does that tell us well from this we

can look at the circumstances again

don't take it without the interpretation

of what the broader market has in terms

of analysis these are very illiquid

conditions and heading into the holiday

trading period is more likely that

people were taking off a significant

amount of speculative interest rather

than building up a new speculative

position that means that the people that

were net long we're probably taking out

their position moving this net position

lower rather than a new short interest

just coming rushing in for no reason

alright so again you take from this

context you put this into a normal

evaluation and oftentimes people

interpret large specula traders are

always right that's not the case it

depends on what the conditions are as

you can see here the correlation is very

high and it just so happens that the

assumption is well that's evidence that

sentiment in large speculative traders

cases is an indication of what price is

going to do it actually is

a more often a reactive phase so the

Aussie dollar rises more speculative

futures interest goes long alright so

you can't really take from that a

one-for-one alright so these are just

two different instruments tools that you

can use that reflect upon sentiment and

positioning but sentiment positioning is

a big analysis technique there are many

different outlets for it there are many

different ways to interpret it but

remember you have to approach it with a

knowledge that this is just another

utensil and your toolbox and it can be

analysed in different ways all right you

can also analyze different groups to

establish a viewpoint on the market and

you always want to analyze the group

that has the impact that you yourself

are looking to exploit whether it be

longer-term trends which would be

central bank's international banks on

wealth funds or whether it be shorter

more abrupt movements like swings

intraday or intra week in the market

that's usually motivated by smaller

retail traders or large futures traders

or hedge funds okay the more you know

about this technique the more you're

gonna get out of it so do more digging

do more analysis you'll find a lot all

right we'll wrap it up here we'll do

another strategy video soon until then I

wish you all good luck trading out there