Forex Education -

Context is everything when it comes to CFTC positioning data

Why it's valuable, but not in a vacuum Bloomberg has a bit of a takedown on CFTC positioning data as a contrarian signal of FX moves. They only look at EUR/USD trade, which is a narrow scope and looks at the net euro position as a percentage of open interest compared to moves over the next four weeks (which is also a narrow timeline).It looks essentially random.Here's what they're missing: Nothing happens in a vacuum. Since April 17, when euro net longs hit a record, the euro is down 3.4%. It was a fantastic contrarian signal in that report.Why? Because it wasn't just about the net position. As I wrote at the time "This euro position looks crazy. The data has been poor lately."If you looked at the huge net long and combined it with a run of incredibly poor data, it was no surprise that in the following week, the ECB started to talk about slower growth and the euro started to dive.Another thing to note is the timing of the change in positioning. For the euro, for instance, much of the rise in speculative longs came in mid-2017 when the euro was trading around 1.12. So a fall from 1.24 to 1.19 isn't the end of the world for the bulls who are deep in the money.The rise in NZD net longs recently is a good example of positioning being underwater. It was something I highlighted a few weeks ago as the kiwi began to drop.An even better example is the Canadian dollar at this time last year (a currency that's notorious for burning specs). Longs piled into USD/CAD (short CAD) in April and May as the pair rose to 1.37 from 1.35 and the net short hit a record in late May but by that time, the move had already started to fade -- the entire position was underwater.The orange line is the FX move and specs got way out of ahead of it and then were quickly underwater and that resulted in a massive move in the other direction, especially once Wilkins signaled more-hawkish policy.So the CFTC data -- like all technical indicators -- won't work in a vacuum. They're not a black box, but if you combine them with other information and common sense, they can give you an edge.

Trade forex like they did at Lehman Brothers

Read the Lehman Brothers Foreign Exchange Training Manual One of the first things a new recruit on Lehman Brothers' trading desk would have gotten is the Lehman Brothers Foreign Exchange Training Manual. It's a 126-page guide book filled with quizzes on how the forex market works. Some of it's basic but there is also plenty of good info on the options and forwards markets. Read it here.

The big signal from the CFTC positioning data that everyone is missing

It's not all about the net The headline from the weekly futures positioning data from the CFTC is always the net specs. That's the net (long minus shots) among speculators. It's great because it offers a rare read on speculative positioning in the forex market. The context is usually historical. So if the net +88K in the euro, it means that there are that many more open futures contracts than shorts, among speculators. Historically, that's very close to an all-time high. Many are drawing the conclusion that means longs are more crowded than ever. That's true but it's also misleading. What's important to recognize is that many more people are involved in futures. Picture a room full of people. You have 88 more on one side than the other. If there are only 200 people total, that shows one side far more crowded than the other. But if there are 2000 people in the room, it's a negligible difference. In a sense, that's what's happened in the forex futures market. For instance, here are overall euro shots. They're far below recent highs but still higher than almost any period before a few years ago. Another great example is sterling. The cable net is now narrowly net long years of heavy bets against GBP but there is still a huge short position in GBP that shows the growth in the forex futures market. So while the net remains the best signal, the amplitude of the market is less-telling than it used to be. Put another way -- a net +50K today is equivalent to a net +25K five years ago. This article is doing the rounds today and it focuses on the net, but it risks exaggerating speculative swings (and it's a bit sensationalist overall).

Four reasons to be wary of the CFTC currency positioning data

Each week the U.S. Commodity Futures Trading Commission (CFTC) issues its 'Commitments of Traders' report Its published Friday afternoon US timeIt covers futures positioning up until the Tuesday prior to the Friday Thus, the most recent report issued Friday 15 September is for positioning as of Tuesday 12 September. This won't be news to you if you've been around a while, but if you are new to markets it might be. In their weekly piece on the Commitments of Traders, ANZ highlight 3 further points (the first of the "4" I stuck in the headline to the piece is a more general warning I post from time-to-time) to be wary of specific to this most recent report: The CFTC cut-off date was prior to the stronger than expected US CPI print and hawkish comments from Bank of England policymakers. This week's FOMC meeting will have a large influence on near-term positioning. Good points. OK, moving on, ANZ on the highlights (bolding mine): The previous week's USD buying proved to be short lived, as leveraged funds resumed selling the greenback again in the week ending 12 September. Overall net short USD positions rose by USD1bn to USD7.5bnDollar selling was largely concentrated against the yenGBP saw only marginal buying of USD0.1bn in the week ... However, sharp price action post the cut-off date on expectations of a November rate hike by the Bank of England (BoE) could see further reduction in net shorts in the coming weeks.CHF also saw marginal buying in the week All other major currencies saw net selling, led by the euroAUD net longs were reduced by USD0.2bn to USD6.6bn, though this was before the release of strong August jobs numbersMeanwhile, net long NZD positions were pared for a sixth consecutive week, by a further USD0.3bn to take overall net long positions to USD0.7bn. Uncertainty over the outcome of the 23 September general election is weighing on the NZDThe CAD also saw a reduction of net longs by USD0.1bn to USD3.6bn Net long gold contracts rose for the ninth straight week on safe-haven demandNet longs in 10-year USTs rose even as yields moved upNet long crude contracts fell despite a pick-up in crude oil prices And ... going through that from ANZ, I reckon I could add (at least) another 2 reasons to my list of 4 (Aussie jobs report, NZ election).

The 6 different elements of FX positioning and sentiment

This is from a HSBC note on the EUR and I though I'd pass it along HSBC discussing this in the context of the EUR rally, but it also perhaps useful as a way of thinking about flows and their impacts. See what you think. -- Has the EUR rallied too far, too fast, and is a reversal now imminent? To answer this we look at six different elements of FX positioning and sentiment across three different types of investment horizons and styles. Fast moving - speculative investors:   FX positioning: long EUR positions have increased but this in itself does not mean a pullback is imminent  FX options: relative call-put prices and call strike levels do not yet suggest the market believes in a much stronger EUR Medium paced - portfolio managers:  Portfolio flows: no investment pick-up into Europe yet, after years of outflows  Equity market conviction: funds remain underweight on European equities relative to history Slower moving - reserves holdings:  Reserves managers: EUR holdings are at multi-year lows, and not rising yet  Consensus forecasts: the sell-side does not appear to have become more bullish on the EUR yet; if anything, consensus is showing a lack of conviction The fast money has become more positive on EUR but not to such a degree that it implies a pull-back is imminent. Meanwhile, the slower moving investors have shown little sign of turning more bullish. If they start to follow the speculators' lead, then EUR-USD could move significantly higher. We maintain a forecast of 1.20 for EURUSD by year-end.-

What is a systematic account?

What does it mean when someone talks about a systematic account? Systematic,otherwise known as model accounts, are basically automated traded concepts which are employed by many funds and CTA's The trading ideas are coded ( they are full of techies) and are triggered when the market meets certain criteria. They often employ breakout strategies (typically previous highs and lows) and tend to be clustered together. Having worked for a CTA and also having watched orders for various funds in my banking days, it is common to see orders clustered at very similar levels A typical CTA order would read as follows " Sell  50 million AUD USD at 0.7330 stop loss entry, if done buy 50 million AUDUSD a 0.7390 stop loss or 7210 take profit" So why do funds employ coded strategies?  Mainly because they promote consistency in trading and are seen as robust and reliable.Asset allocators like to see a coded systematic approach when they invest in funds. 

Why is the CFTC Commitments of Traders report so valuable?

How to use CFTC Commitments of Traders data Each Friday at around 2:30 PM ET, the CFTC releases the weekly Commitment of Traders report.  What is it? Why might it be important? The Commitment of Traders report is produced by the Chicago Futures Trading Commission. In it, it shows specifically, the net speculative positions in a number of futures instruments.   Why speculative and how do they know? When an order is placed on the floor of a futures exchange, the buyer or seller matches each other off. For every buyer, there is a seller.  The exchange just clears the transactions. That is, they make sure Trader A who bought, has enough margin in his account to buy, and Trader B who sold, has enough margin in his account to sell.  The exchange will allow Trader A to sell to another trader, Trader C when that trader wants to get out. Trader B has the same flexibility too.  That is they can get out through a trade with Trader D (or E or M or Z, etc).  Now transactions in the futures pit are further bucketed into two main categories.  HedgingSpeculatingIf the Trader A is hedging an exposure in a currency, he instructs his broker the trade is a hedge.  That allows hedge accounting.  Basically, the gain or loss on the transaction can be accrued over the life of the hedge for accounting purposes.  It can get complicated and I am not an accountant but that is the general gist of it. Conversely, if Trader A is speculating for profit (or loss), he instructs his broker the trade is for speculation.  If so, the gain or loss is realized when the transaction is closed. There is no accruing the P/L over the life of the hedge. You have a short or long term capital gain or capital loss instead.   Now hedgers and speculators have different fear factors and also objectives.  A hedger might be a corporation in the US who has to hedge a payment he will need to make in June to a UK producer of a good he is purchasing. The treasurer thinks the cost of the GBP will go up before June, so he buys protection for that expectation.   He is happy with the price he pays today for that protection in the future.   His company is hopefully profitable at the price he pays today for his hedge.   Does it mean the hedge will be profitable? No. The GBPUSD could go lower between now and the expiration of the contract, and his hedge could lose money. However, when the US treasurer makes his payment for goods in the future, he will be buying GBP at a cheaper price. So the gain on the lower price in the currency, will be offset by the loss in his future account. That loss is what gets accrued over a time period using hedge accounting.   Is that treasurer worried?   He (or she) may want to see the hedge be profitable.  If it is, he can go to his boss and say, "Look, I saved the company this much from our currency exposure by doing this hedge. Give me a bonus equal to it (haha)"   But in reality, the treasurer should be ambivalent. After all, his company is not in the currency speculation business. What he should be happy about is he hedged the currency risk  - the exposure. He locked in the rate, and at that rate, the business was profitable.  So he should not be worried about what currency rates do.   What about a speculator? Speculators for profit trade because they want to make... profits.  IF they don't buy low and sell higher, they have less money in their marked-to-market account each day.  So they can be more influenced by swings in the price. The price can go for them (in their favor) or against them (not in their favor).  Therefore, speculators have more fear in their trading because trading IS their business.  They are successful, or not successful depending on how they trade.   That is their bottom line.   So what does the Commitment of Traders report show? The Commitment of Traders report takes a snapshot from the close of business on Tuesday of all the positions from Trader A, B, C, D...Z,.etc. and determines which ones are hedges and which ones are earmarked as speculative positions.   It then sums up the total hedges and total speculative positions, to get a summation for each. The report will show the net speculative position of ALL the positions. Tell me more...Tell me more.... So say there are 106K net short speculative positions in the GBP (it really means GBPUSD).  What does that mean?  Simply, it means that if you added up all the customers net speculative positions it would show a short of 106K.   If for every sell there is a buy, where are the buys?   The 106K longs/buys are on the hedging side. In other words, the net speculative shorts should = net hedged long positions. Since there are 106K speculative shorts, there should be 106k hedged buys.   What is a characteristic of hedgers? They don't really care about the P/L on their position. They are hedging risk for their business.  What is a characteristic of speculators?   They REALLY care about the P/L on their position because trading is their business. If they don't make money, they are out of business. Tell me even more.... Rather than tell you let me ask you a question first. "If the market is short a record amount of GBPUSD, what would be the worst case scenario for those shorts?' The answer is of course, the price of the GBPUSD moved sharply higher.  This is their business after all.   If the speculators wanted to get out of their short positions because the price is going sharply higher, and there is a record amount of shorts already, what may happen?  There could be a rush to buy at the same time.  Who sells to them? Other speculators. But remember a lot of traders are already short and losing.  OR,Hedgers What might attract more hedgers? Well, some business transaction whereby someone or corporation needs to buy dollars cheap (as the GBP gets expensive, the dollar gets cheaper).   Other speculators might come in too, or traders who are already short, may look to "double up (or triple up) to catch up". That is they go "all in", and push all their chips in with a pair of 6s.  What if there are limited sellers?  i.e no hedgers and/or the speculators are all shorted up already.   The price squeezes higher and higher.... until the price gets to a point where the sellers finally are able overwhelm the buyers (i.e. more hedgers or more speculators come in). What about the Commitment of Traders Report today?  Last week's Commitment of Traders Report showed that net shorts in the GBP (i.e. GBPUSD) was short 106K contracts.  That net speculative position is near record short levels (the largest position was 108K).   Since the report shows the net position at the end of Tuesday (it is a snap shot of the positions after the close), that report would have been the net short position as of March 11th.   ON March 11th the price closed at 1.2490.   This Tuesday (March 18th) was the day the price shot up on the UK snap election announcement.  The price of the GBPUSD closed on Tuesday at 1.2838.  That is a difference of 348 pips from the March 11th close.  For record number of speculative positions, those pips are losses that hurt (PS hedgers are looking good).   Today's report will give us an indication of what did the net speculators do since March 11th. Did they get out, and cover in the run up (i.e the net position cut)?, or Are they still in it and hoping for a turn around (i.e. little or no change in the position)?How can it help our trading? What we will know from today's report is "Is there a chance for more of a squeeze?".  That would happen if the shorts remain large.   IF, on the other hand, the shorts are cut dramatically, we know the move higher on Tuesday was likely fueled by shorts covering.  It will also mean the market is more balanced. As a result, we could go either way more easily from this point. That is important to know.  It sets a different trading mindset. Does a large short mean we will continue higher in the GBPUSD? It depends.  However, if there is something bullish fundamentally for the GBPUSD next week, there is a better chance, the shorts get squeezed and the price can scoot even higher, quickly.  Pain and fear can drive traders to panic.  Note, it is the probabilities that increase for the short squeeze potential that  is most important. What if there is something bearish fundamentally with a large short position? The price can go down, and the traders who are feeling the pain this week, will get some pain relief.  However, they may also be more inclined to buy a dip as well.   A "get out of jail free card", often makes dips easier to buy when at one point you were looking over the edge and wondering if you should jump.  So be on the lookout for patient buying opportunities perhaps.  Shorts may be looking to lighten up given the chance to do so.     Summary The Commitment of Traders report is a snap shot of risk and fear. When the position is large and going traders way, all are happy.  Hedgers don't really care they are losing money.  Speculators are all making money.   Conversely, when speculative positions are large and the price is NOT going the traders way, fear increases and there is a chance for quick squeezes in the direction opposite the position.  As speculative traders, knowing how the market is positioned could help in your trade strategy and mindset. If there is a chance for a squeeze because shorts are the wrong way in a rising market, and fundamentals are going against them, squeeze the shorts. GO  Alternatively, you can also look to buy a patient dip, in anticipation of the shorts paring back positions on retracements.  In other words lean against support levels.  Like a card counter at black jack, "counting the cards" in trading (i.e. knowing the positions) is a way to put the odds in your favor.  It should help you in the long run, and also give you a clearer mindset on how to trade the market as well.  

Forex option contracts, their impact and how to trade off them

Here we explain what forex option contracts are and how to use the info Barrier options - For those unfamiliar this is type of option whose payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price. A barrier option can be a knock-out, meaning it can expire worthless if the underlying exceeds a certain price, limiting profits for the holder but limiting losses for the writer. It can also be a knock-in, meaning it has no value until the underlying reaches a certain price. A DNT (Double No Touch) is an option that gives the trader an agreed-upon pay out if the price of the currency pair does not reach or surpass one of two predetermined barrier levels. Traders pays a premium and in turn receives the right to choose the position of the barriers, the time to expiration, and the pay-out to be received if the price fails to breach either barrier. With this type of option, the maximum possible loss is just the cost of setting up the option Once either side (barrier) is hit then the option ceases and the writer wins. The giant Panda, aka Peoples Bank of China, have been notable users of these contacts over the years and given the size of them, will defend a level rigorously. In recent times we have seen EURUSD barriers mostly put in on in a range of 1.0550-1.1350 with additional interest in between but these options can be traded in other pairs too of course. Today we have barrier option interest at 110.00 on USDJPY. Barrier options are used particularly around times of great volatility such as the Grexit turbulence, Brexit, and US elections. Where we know the levels we will highlight them in the daily order boards. In today's EURUSD 1.0700 barrier option example we saw a successful defence producing a rally but failing to make headway above 1.0730 and eventually being breached as general USD demand prevailed. As a rule we can expect these levels ( bids or offers) to hold first time round and therefore buying/selling into these levels will invariably bring some reward Vanilla options - My daily posts refer to these that expire each day at 14.00 GMT. A financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, within a given time frame.  A vanilla option is a normal "call" ( The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time for a certain price. The seller is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee for this right ) or "put" ( gives the owner of a put the right, but not the obligation, to sell an asset, at a specified price ) option that has standardized terms and no special or unusual features. It is generally traded on an exchange such as the Chicago Board Options Exchange. This means that the contract will still be "live"/in play until expiry time which is generally designated at 10.00 am NY ( 15.00 GMT) each week day. This is different to a " barrier" option which is "dead" once breached. If the prevailing price is close, say 30-50 pips away, and the expiry is large ( $750m + but smaller in less liquid pairs) we can often see the price affected/magnetized as battle ensues from both buyer and seller. We don't see the details of whether it's a "put" or "call" but the price action leading up to the event is what we're really looking for. There is no precise science to this and any impact will largely depend on the prevailing market sentiment, but yes we can sometimes see a sharp reveral leading into the expiry only to resume previous trend after. I cover options, orders, flows and liquidity in our online training courses that have proved very successful in the past 18 months. Keep your eyes peeled for the next one where you'll be able to spend 2 hours in a webinar with me and have the opportunity to answer questions. I hope this has helped your general understanding of how these instruments can impact on flows and therefore hopefully add another weapon to your FX trading armoury.

Go with the flow, or not as the case may be

The earlier surge in GBPJPY highlights the impact that large order flows can have on the market. Further to my response to reader Jerry's question in the comments section I just thought I'd add a bit more detail about how to trade these flows. Subscribers to our ACT course online last Summer heard me expound in more detail about what still remains a mystery to many retail traders who have not experienced the cut n thrust of market making. The key thing to note is that flows have no trend per se and indeed can often have little to do with the prevailing trend, often correcting recent moves. That's been the case with GBPJPY which has seen steady falls but this morning saw a sharp and rapid reversal from 152.00 to 154.00 after recent falls from 157.00 to 151.65.  Flows are on-going and occur when a corp or trading desk have something to cover or instigate. "Go with the flow" is a mantra oft spoken/preached and I stand by that but in the case of a large order like we saw earlier then you have to judge how much mileage there is left by the time you jump on. Get in early and you can enjoy the ride. Get in late and you're left adrift and struggling. As always, info is king and you're not always going to know so how else can you judge the momentum? Orders/flows vary in size and their impact will depend not just on size but also the prevailing liquidity as well as the element of surprise. This morning's orders caught the market off guard early in the European trading day and against the prevailing softer trend but yes, will have been of very large size too. The knock-on impact can/will be seen across other related pairs as the GBPJPY order will ultimately find its way into the core pairs. Hence GBPUSD orders around 1.4150 were filled and then more at 1.4180 triggering stops which then took out the supply into 1.4200 before finally exhausting itself into the next tranche at 1.4230.  EURGBP didn't/couldn't ignore the impact and had its own wobble through 0.8050 demand to post 0.8005 ahead of strong support/bids at 0.8000. Meanwhile USDJPY made its way in rapid time from 107.85 to 108.28 before running into fresh supply at 108.30. So, lo and behold, we're back to 1.4185, 0.8025 and 108.06 proving on this occasion that patience was a virtue if you are a rally seller on GBPUSD and USDJPY or dip buyer on EURGBP. Forex markets aren't rocket science as I frequently point out here and for me flows highlight both the simplicity and the speed at which markets can and will operate. Likewise the technical analysts amongst you will sometimes welcome the opportunities they provide whilst scratching your head as to the cause. Understand though that flows and orders are fundamental to the very core of price action, albeit sometimes led by techs too. So next time it happens dear reader have a think about how you're going to play it. Sometimes you'll hit the extremes to your advantage and that's great, but rare. Mostly you will find yourself drawn into tranches of selling or buying while being curiously unaware of why the moves are happening. In those cases you will invariably have to suffer some pain but, when it's order/flow based, as we revealed here earlier rather than something more earth-shaking, patience will invariably bring its own reward. As always we welcome further questions in the comments section below.

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