Positioning Data

Tim Mazanec is a CMT with 14 years of experience in Forex and global markets.   He develops his forecasts with a combination of technical, fundamental and flow analysis and is a regular contributor on currensee.com.

Positioning Data

by Tim Mazanec

The other day I was asked for my thoughts on Sugar.   This came from a good friend so I took the request seriously and steered clear away from any and all fructose jokes that may have came to mind.   He alluded to a few fundamental arguments that called for further appreciation in Sugar.   I volleyed with some technical analysis viewpoints for potential projections and corrections in price, but in the end what really matters is the positioning of investors and traders in the market.   Simply put, it’s more important to know if the market is one-sided or if it is evenly split than to debate some of the supply and demand issues that may impact the price fundamentally.   This is especially true for those that trade this sort of commodity and have very little knowledge of the underlying industry.

Why do I bring this up?   Have a look at EURUSD last week.   While stock markets were reversing and the Dow Jones was doing its best to trade back below 10,000 there was a different story playing out in FX.   EURUSD did break out of its 1.4250 – 1.4525 range that it had been trading in but it never seriously threatened trading below 1.40 last week.   Why not?   To me EURUSD is the ultimate gauge of global risk-taking and if stocks are reversing then shouldn’t EURUSD be trading lower as well?

One can certainly look to the COT report that is published by the CFTC, but the positions are from last Tuesday.   When did last week’s correction begin?   Last Tuesday night / Wed morning when a Republican took the Senate seat in Massachusetts (adding uncertainty to the proposed US health-care system among other things).   At the same time news that Beijing told banks to stop lending certainly made headlines in the rest of the world.   Therefore, especially in this instance, the COT report will be viewed as dated when it is published (with a 3 day lag).

The beauty of Currensee is that the MarketWatch table shows the positioning of traders and investors in real-time.   If you go from Long to Short you will see the change right away, not 3 days later.   There is also more than one way to view the MarketWatch data.   One way is to view the currency pair and positioning by positioning volume.   For instance, as of writing at midday on Monday (Jan. 25th, 2010) 75% of traders had moved to Long in EURUSD.   Another way is to view the nominal amount of traders with a position at stake in a currency pair.   In this case it is almost evenly split with the amount of traders Long EURUSD vs. traders Short EURUSD.

How can that be useful for the events in the week ahead?   Well among other items of interest in the remainder of the week is the potential confirmation of Ben Bernanke to a 2nd term as the Fed. Governor.   If Bernanke is confirmed with the necessary votes then the markets will have a better guestimate as to what to expect from the Federal Reserve in 2010 (low rates).   If somehow he fails to be confirmed and uncertainly regarding the prospects for US monetary policy increase then knowledge of how other traders are positioned is a powerful tool for a trader.   If traders are still Long to the tune of 75% by volume in EURUSD and general market uncertainly increases then one would certainly think that some of those traders that are Long EURUSD will be reversing their positions and forcing EURUSD lower.

It’s not just US based events either as certainly speeches by BOE’s Mervyn King and top economic data including Germany’s IFO will gather the attention of traders this week.   Although potentially more important is how traders are positioned going into these events that will dictate the price action afterwards.

Want to see what other traders are doing in real accounts? Check out Currensee. It’s free.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.