The Importance of Positioning in Trading: A Critical Factor for Success
Positioning plays a crucial role in trading by identifying high reward/risk ratios and influencing market movements. This article discusses why positioning is more significant than price, how to capitalize on crowded markets, and provides real examples like GameStop and Long-Term Capital Management. It also highlights the use of Commitments of Traders (COT) reports to make contrarian trades based on speculative positioning. Understanding and leveraging positioning can lead to profitable trading strategies.
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Presentation Transcript
CROWDED MARKETS WHY POSITIONING IS THE MOST IMPORTANT FACTOR IN TRADING
POSITIONING OVER EVERYTHING Positioning is the most important factor to making money in the markets Identifies high reward/risk ratio, which is what trading is all about Most traders look at price as the main discounting mechanism Positioning is the ultimate discounting mechanism instead of price Traders crowded long shows good news discounted in the markets Traders crowded short shows bad news discounted in the markets As a contrarian, trying to fade price will be death sentence, which is why being contrarian to positioning is more successful When Speculators are super long, you want to be short When Speculators are super short, you want to be long www.crowdedmarketreport.com
POSITIONING EXAMPLES GAMESTOP (GME) Garbage company that was failing and everyone knew it Large hedge fund was shorting the stock in massive amounts (short interest > float) Everyone wanted to squeeze the HF since there was no stock left to short As a result, the stock price shot up Today GameStop is back down to pre-short squeeze level and the difference is positioning. LONG-TERM CAPITAL MANAGEMENT L.P. (LTCM) Highly leveraged hedge fund in the late 1990s Brain trust of Wall St. making leveraged bets on mathematical certainty The big trade was a bet on the Euro coming into existence and interest rate convergence trade Missed the counter party risk on a bet with Russian banks who did not pay To make margin call on the Russian trade, they liquidated the Euro bet, but due to positioning being so crowded, there was no one take the other side, no bid, and ended up blowing out The Euro trade ended up making money, but everything that happened was due to positioning www.crowdedmarketreport.com
COMMITMENTS OF TRADERS (COT) COT published by CFTC on a weekly basis Three types of traders Commercials Hedgers that receive lower margin rates. Example: Gold Miners Large Speculators Trades reportable positions which exceed a certain position size Small Speculators Trades non-reportable positions due to small position size COT report shows you how traders are positioned in over over 200 markets from Equities, Currencies and Metals to Livestock and Crypto Currencies How to use the data as a contrarian Wait for Speculators to get super crowded on one side and take the opposite trade Speculators have a higher probability of being wrong when crowded at the turns Examples: Early 2023 Nasdaq long Mid-2023 S&P short www.crowdedmarketreport.com
CHART EXAMPLES 2023 NASDAQ LONG www.crowdedmarketreport.com Speculators max short on an indexed level www.crowdedmarketreport.com
CHART EXAMPLES 2023 S&P SHORT www.crowdedmarketreport.com Speculators Max Short on an indexed level www.crowdedmarketreport.com
COT AND TREND FOLLOWING SYSTEM COT can provide an exit point for trend followers when positioning gets crowded against the trade. Help with risk adjusted returns Example: Bonds March 2023 squeeze Trends will continue longer and stronger when there is no positioning bias. Allows you to select the right market that is in a trend where a trader would select the market with the least crowded positioning If there are two exact markets and both are trending, but one has a positioning bias against the trend, the other market will outperform the biased market www.crowdedmarketreport.com
CHART EXAMPLES 2023 BONDS SQUEEZE www.crowdedmarketreport.com Speculators max short on an indexed level www.crowdedmarketreport.com
COT DATA CAN HELP NON-FUTURES TRADERS COT data is for Futures only, but that does not mean you can't take advantage of the data as a stock/ETF trader There are many ETFs that track Futures (ex. SPY, QQQ, TLT) where you can take leverage positioning data to make skewed trades Another approach is cross markets Example: Speculators are short stocks and oil. Rather than take two positions, a trader can long oil stocks. There are many ways to use the COT data in stocks and find good risk/reward tades www.crowdedmarketreport.com
THE BEST TRADE I EVER HAD SWISS FRANC Bought Swiss Franc in January of 2015 Speculators were massively crowded short Over thew weekend, Swiss Bank said they were going to de-peg the Swiss Franc from the Euro. News that I could have never predicted Due to positioning, Speculators had to get out of their position and the Swiss Franc squeezed higher in a short amount of time Once positioning was out of the way and Swiss Franc s price returned back close to the pre-bank announcement level Fundamentals meant nothing and the move up was due to how crowded the speculators were www.crowdedmarketreport.com
CHART EXAMPLES 2015 SWISS FRANC Speculators max short www.crowdedmarketreport.com on an indexed level
TRADING COMMENTARY COT report is not perfect and does not always work. Markets may become crowded and continue to be crowded for a while It is a tool that can help a trader identify high risk/reward trades Risk management must be a key part of the process COT is not predictor of markets bur rather a risk manager that can keep you out of trouble at the very least Trading is all about managing risk and taking high reward/low risk trades There is a misconception that to be a great trader, you have to be able to forecast the market THAT IS WRONG The goal is to make $5 when you win and give up $1 when you lose. Overtime, that will make you successful. Goal is to make money over time, not make money every time. www.crowdedmarketreport.com
THANK YOU! To download the full presentation please go to: www.crowdedmarketreport.com/t4ac Use coupon code T4AC for 10% off any CMR membership initial payment. Coupon expires 12/31/2023 www.crowdedmarketreport.com
