[Entropy]

My goal here is to start discussion about trading the forex market. Through the use of both fundamentals and technical analysis. From the fundamental point of view, emphasis is on: risk on/risk off; global currency flows, bond rates and their reaction to various central banks decision(especially, european/usa monetary policies); carry trades equilibrium, commodities appreciation and depreciation(especially gold and oil) with regards to currency correlations(e.g usd/cad, aud/usd); fundamental reports(gdp, inflation numbers, quantitative easing policies, pmi numbers, current account balanceetc) and market reaction as indicators. Of course, observing how various stock market indices, such as the DAX, FTSE, CAC, S&P handles market info. All this to ascertain the major direction of each nations currency with respect to the others. I am sure i am missing a couple of things.

From the technical point of view. My main focus is the use of S/R levels and trendlines. Confluence trading using s/r levels and trendlines intersection to determine trades. With an eye towards the fundamental and technical structure of higher time frames(monthly, weekly, daily) to guide the direction of the trend. Some of the things that i have noticed about trading S/R and TL confluence on larger time frame is that, whenever or where ever they occur, they hardly occur in isolation. They also tends to be part of another pattern, i.e., the TL could be part of a pennant formation or a channel or a head and shoulder or a double top/bottom, ascending/descending triangle, or flag formation, or Gartley formation, etc.

For the S/R Levels or demand and supply zones, it is not uncommon for some of them to concide with flat top/bottom triangles or rectangle formations. All these different formations probably serves to bring in other players looking at different things to put their money at that spot of confluence.

Also, it is not at all unusual to see FIB levels zones of 38 or 50 or 61 in close proximity to the confluence spot. Which probably brings in the fib players.

Since focus is on H4 and above, most likely the confluence spot will fall very close to a round number psychological area, which has its attraction for some people.

Even candlesticks comes into play here, because when you zoom into candlesticks, there are times when a candlestick is just a classic chart pattern when viewed from a lower time frame. Try this, go to monthly time frame and choose any random candlestick. Mark its boundaries. Then go to lower and lower time frame to view those boundaries. I can almost guarantee it, that the weekly candlestick will morph into one of many classic chart patterns within those boundaries when viewed from lower time frames. In essence, the candlestick trader could be trading S/R and TL confluence while trading his candlesticks.

Basically, what i am saying is that the reason why S/R and TL confluence on higher time frames shows such remarkable success rate could be because of the converging different styles of traders focusing on the confluence spot for whatever personal reasons.

Maybe this is why confluence on higher time frames(where it gets more noticed by different traders with different style)works so well. Due to many different style of traders putting their money down around that spot for whatever different reasons.

Bottomline here is this: the way i see it is that i dont even need to see all these other patterns, when all i need is a confluence of S/R and T/L. That is it. That take care of everything. Which goes to a hypothesis: most technical chart patterns and candlesticks are simply S/R and TL, or (S/R or TL) when you really think about it.

HOW DO I MAKE THE MOST OF THIS?

In trading, it is my core belief that we have to balance win ratio with return on risk. The higher the win ratio, the lesser the return on risk; and vice versa.

A trading system that combine win/loss of roughly 60% along with a regular 8R to 20R(r:r of 1:8 or 1:20) are very rare, if they even exist at all. That is my little observation about trading.

AXIOM: Any system with a high R/R ratio must use a higher time frame for setups and lower time frames for entry. The greater the differential, the better.

Now, how does one take care of the poor win:loss ratio that plagues such a system.

There are other solutions, of course. But the one that has worked for me is to combine/hybridized a scalping system on a lower time with a trend trading system of higher time frame. That is, enter at the entry point of the scalp(1mins to 15mins), but use the PT of the trending trading system(H4 to weekly). If the scalping system has a respectable win/loss of say, 60% and above; and the trend trading system has a respectable win/loss of say 60% and above. We are in business. Of course, there is going to be a sizable dose of breakevens, this is the nature of the beast. It is essentially a trading system within a trading system. A hybrid. This is optimal for high risk/reward, of say, 8R or 20R with a win rate of 60%. It is risking around 4pips to 15 pips to make 100pips to 243 pips or higher.

Trend trading breakouts for my higher time frame strategy has this structure: higher highs/lows or lower lows/highs. (i cant really post image links until i have 10 posts - roosh rules)

The higher time frame methodologies are: swinging/wave movements and polygonal breakouts on the daily frame using lower 1/8th or 1/4th b-p-c.(BREAKOUT - PULLBACK - CONTINUATION). I am sure there are others, but these are the ones that i personally know to result in 60% win rate or higher.

For the scalping method: One trading method that i found to have at least 60% success rate at 1min to 15mins time frame are ascending or descending triangle breakout, that ran, pullback, and then continue in the direction of the breakout. With entrance at the reversal candle at the bottom of the pullback.
From my own personal study, i notice this method works in all time frames. Lets called this by acronym: TBPC

(would love to post image links...but...i cant until i have 10 posts -- roosh rules)

As such, the combination of the two:using the higher time frame trend trading to set the PT and the lower time frame TBPC to set the entry yields a high win:loss with a 10 to 20 r:r.

This is the framework. There is nothing groundbreaking here. It is simply a combination of two elegantly simple techniques. I will start posting live setups

IN A NUTSHELL:

All these systems are simply little variations of the same thing.

(1)find a robust, simple system on a higher time frame with a good win/loss of 60% or higher; with a 1:1 to 1:3 r/r

(2) find a simple, robust system on a LOWER TIME FRAME with a good win/loss and a decent r/r of say 1:1 to 1:3.

(3) merge the two together. Use as your entry the lower time frame methodology, while using the TP of the higher time frame for exit. Sometimes, it is the same system from a 4hr or daily time frame that is now replicated on a 5mins or 1mins time frame, inside itself. This is how i know to get a decent win/loss ratio with a respectable R/R of say, 1: 8 to 1:20(especially, if the setup is weekly or monthly, and the entry is 1 or 5mins.). Of course, breakevens increases. and win/loss drops due to the noise of 1mins...that is why i look far away from red-labeled news.

(4)Use purely price action. Trade with the trend. Avoid red-labeled news.


THIS IS THE CORE OF MY FOREX TRADING PRINCIPLES. I will start posting chart setups as soon as possible.

[Entropy]

Here is an attachment illustrating the TECHNICAL analysis aspect of my forex trading.
   

[Entropy]

This was a trade i took yesterday. LONG the cable(the british pound agains the USD) at 1.57191

[Entropy]

Well, i couldnt post a link to my earlier setup charts(it is on a trading forum). I have less than 10 posts. so.

anyways, there was a setup earlier in gbp/sgd. that is the british pound aka cable against the singapore dollar. It was a long position at confluence spot of TL and S/R....granted the fundamental data from SGD is stronger than that of GBP...i took the trade as purely technical play...otherwise, i prefer to align fundamental with technicals. This disequilibrium in fundamental is also why the trade has a very precise exit point at +100 pips gain. (if it reaches it. currently, it is at +61 pips.) there is also the issue of GBP pmi news that may interferes with things....comin up in 2 hours also. Anyways, below is the setup chart.

[Entropy]

(02-03-2012 02:53 AM)Entropy Wrote:  

Well, i couldnt post a link to my earlier setup charts(it is on a trading forum). I have less than 10 posts. so.

anyways, there was a setup earlier in gbp/sgd. that is the british pound aka cable against the singapore dollar. It was a long position at confluence spot of TL and S/R....granted the fundamental data from SGD is stronger than that of GBP...i took the trade as purely technical play...otherwise, i prefer to align fundamental with technicals. This disequilibrium in fundamental is also why the trade has a very precise exit point at +100 pips gain. (if it reaches it. currently, it is at +61 pips.) there is also the issue of GBP pmi news that may interferes with things....comin up in 2 hours also. Anyways, below is the setup chart.

Here is the update chart to this trade. Like i said, i wish i could link all this to the trading forum where i posted this earlier...but i cant.(i have less than 10 posts) as such, i cant link. oh well. Below is the updated chart:

[Entropy]

i took a long position in the GBP/USD earlier.(like i said previous) i posted the trade at another trading forum but i cant link to it since i have under 10 posts). Anyways, It is a long position in the GBP/USD after she broke major daily S/R levels. Naturally, i keep an eye on news. GBP pmi data in 2 hrs and USD employment data at US trading hours will probably affect the market one way or the other. That is why as soon as my long reached +40 pips and encouter resistance levels, i quickly move to B/E with +5 pips. Target is around +60 pips. all marked on the chart below.

chart attached:

[Entropy]

(02-03-2012 03:01 AM)Entropy Wrote:  

i took a long position in the GBP/USD earlier.(like i said previous) i posted the trade at another trading forum but i cant link to it since i have under 10 posts). Anyways, It is a long position in the GBP/USD after she broke major daily S/R levels. Naturally, i keep an eye on news. GBP pmi data in 2 hrs and USD employment data at US trading hours will probably affect the market one way or the other. That is why as soon as my long reached +40 pips and encouter resistance levels, i quickly move to B/E with +5 pips. Target is around +60 pips. all marked on the chart below.

chart attached:

update on the GBP/USD trade after moving +40 pips in my direction. Like i said earlier, i am expecting BRITISH pmi NEWS and USD employment news later...so i have locked in some profits and keep this a risk free trade.

chart update:

[Entropy]

(02-03-2012 03:03 AM)Entropy Wrote:  

update on the GBP/USD trade after moving +40 pips in my direction. Like i said earlier, i am expecting BRITISH pmi NEWS and USD employment news later...so i have locked in some profits and keep this a risk free trade.

chart update:

CLOSED THE trade for +65 pips. Price was pushed up by the british PMI news. the USD nfp news is coming at 8:30am EST. CHART update attached.

here is the initial setup chart

here is the update chart

and below is the final chart.

[Entropy]

It is friday. Done with the trading week. Made some nice money too. As customary, celebrate with tits and liquor.



And of course.....

[chyamor]

Nice post, I will go over your notes in detail this weekend

[Entropy]

The End of Capitalism?

The system is not sustainable. Eventually, china, japan will stop funding all these shit.

there will be a day of reckoning. you cant just print money out of thin air (fiat currency) for soo long...and keep sticking the taxpayers with it when things go wrong....This is what i believe is going to bring the system down: toxic derivatives. Why? Well, as of 2007, there is estimated over $516 trillions in toxic derivatives in notional value. The US GDP is $15 trillion. The US money supply is also around $15 trillion. The total GDP of the entire planet is $50 trillion. Total value of the entire worlds stocks and bonds market is $100 trillion. Total value of the entire worlds real estate is $75 trillion. Compare that to the $516 trillion in toxic garbage.

Now, the fed's balance sheet before the mess in 2008(which further exposes the fed to junk) was $800 billion--mostly in treasuries. Look at all those numbers again and then compare it to $516 trillion in derivatives toxic sludge. Given the new, increasing debt that the FED started taking on since 2008...they've expanded that balance sheet by simply printing money. Take a look at the FEDS balance sheet. For a more comprehensive reading, check here. And i genuinely believe they are being dishonest....

And you want to tell me that shit is not going to hit the fan at some point? How much money can you print to cover up this stench?

And you know the best part? Banks keeps finding more ways to make more derivatives. And they are never going to stop. They've bought the politician and nobody is going to audit the federal reserves except ron paul or alan grayson. Since we do not have auditing/transparency at banks...i am willing to guess that the amount is even higher.

In my humble opinion, toxic derivatives is going to be the end of it all. I have to say: it does matter that they have toxic derivatives, how the heck are you going to get out of $516 trillion in toxic derivatives when the total GDP of the entire planet is only $50 trillion? when the entire stocks and bonds market of the world is only $100 trillion? close your eyes? The Greek external debt that is causing all this euro mess(among other things causing the euro mess) is only $583.3 billion(scroll down to see it); the Greeks public debt is 329.35 billion euros. That is nothing compared to $516 trillion of toxic derivatives garbage. Trillions, my good man. Capitalism might have taken things to the extreme that will destroy itself.

What percentage of that $516 trillion in toxic derivatives need to default before a domino effect/cascade effects happens and everything falls like a house of cards? 2%? 5%? 10%? On top of that, since the fed and other banks are not transparent, and a lot is not regulated, i wont be surprised if THE AMOUNT IS EVEN HIGHER.

We are all living on borrowed time. At least, the western world is. The end of capitalism? Milk it while you can. Make haste while the sun shines.

that is my two cents.

A blast from the past

.
.

[Entropy]

(02-03-2012 02:56 AM)Entropy Wrote:  

(02-03-2012 02:53 AM)Entropy Wrote:  

Well, i couldnt post a link to my earlier setup charts(it is on a trading forum). I have less than 10 posts. so.

anyways, there was a setup earlier in gbp/sgd. that is the british pound aka cable against the singapore dollar. It was a long position at confluence spot of TL and S/R....granted the fundamental data from SGD is stronger than that of GBP...i took the trade as purely technical play...otherwise, i prefer to align fundamental with technicals. This disequilibrium in fundamental is also why the trade has a very precise exit point at +100 pips gain. (if it reaches it. currently, it is at +61 pips.) there is also the issue of GBP pmi news that may interferes with things....comin up in 2 hours also. Anyways, below is the setup chart.

Here is the update chart to this trade. Like i said, i wish i could link all this to the trading forum where i posted this earlier...but i cant.(i have less than 10 posts) as such, i cant link. oh well. Below is the updated chart:

The retracement kick me out at +5pips. Good thing i B/E the trade. GBP/USD = +5 pips gain. I was aiming for +100 pips, but...you cant win them all...still, better than a total loss.

Anyways, a new trading week begins....with the ASIA open....

To celebrate the beginning of a new trading week(may pips abound to all) :



Here is the Gambler's song:

[Entropy]

(02-03-2012 05:25 AM)Entropy Wrote:  

(02-03-2012 03:03 AM)Entropy Wrote:  

update on the GBP/USD trade after moving +40 pips in my direction. Like i said earlier, i am expecting BRITISH pmi NEWS and USD employment news later...so i have locked in some profits and keep this a risk free trade.

chart update:

CLOSED THE trade for +65 pips. Price was pushed up by the british PMI news. the USD nfp news is coming at 8:30am EST. CHART update attached.

here is the initial setup chart

here is the update chart

and below is the final chart.

Posting this chart oif GBP/USD below to show what happened when NFP hits. that is why i closed the trade at retracement for +65 pips.

the major economic news shattered the bullish setup.

[Samseau]

Holy shit this is amazing. Welcome to the forum. A real technical trader with tons of experience and analysis to offer.

To anyone who's interested in making money off the markets... study this guy. He knows what he's doing.

Entropy, as far as the endless toxic derivatives go, I'm on the same page as you. This will end in hyperinflation.

[Entropy]

(02-03-2012 09:52 AM)chyamor Wrote:  

Nice post, I will go over your notes in detail this weekend

Hello there "chyamor", welcome to the thread. Wishes you happy reading.

If you dont mind, let me send you a youtube video of people that have been valuable to the development of my trading principles. There are a boatload of others and a shitload of endless reading material. To give credit where credit is due. But those two below(hector and wmd) took it to another level.

hector/yaguex: he has over 177 videos of live trades. I have studied all his videos, inside and out, like crazy. All of them. I know pretty much all of them by heart. I didnt buy his course. Of course, if you buy his old course it will accelerate your learning curve. Personally, the only thing i buy are trading books. There is soo much out there, that with a dint of solid hardwork and solid use of your brain you can glean and digest what to do. Anyways, here are his videos...head over to youtube and start all the way from the RIGHT and head left. Enjoy.

If you insist on his trading course, here it is.

A Second lad is WMD....he is such master of precise entry it is uncanny. Of course, i have studied and master his techniques. From the importance of the "3rd touch/entry" to the "hook" interpretation of supply and demand zones or S/R levels. I didnt buy his course either. Will it help to buy it? absolutely! If you are a hard-worker do you need to? Absolutely not! Anyways, enjoy:
(start from the RIGHT and head left. on youtube)

If you insist on his trading course, well, here it is.

One of the things i like about these lads is the complete lack of indicators. There is soo much out there that with a dint of herculean hardwork, you can get all the knowledge for free without having to buy a book or any course.

The last one i will grudgingly recommend is mr fxeuro. I dont like his use of indicators. However, there is a trading method he uses where he doesnt use any indicators. That method is solid. I have posted the useful videos below:

#2.

#3.

Naturally, of course, the first place to start trading forex is to google "babypips" and read it from top to bottom. THERE IS NO ESCAPE FROM HARDWORK. This will take years.

I also swing trade stocks. I will get to those later.

( no trading setup during asian session for me today....)

[Entropy]

(02-06-2012 12:28 AM)Samseau Wrote:  

Holy shit this is amazing. Welcome to the forum. A real technical trader with tons of experience and analysis to offer.

To anyone who's interested in making money off the markets... study this guy. He knows what he's doing.

Entropy, as far as the endless toxic derivatives go, I'm on the same page as you. This will end in hyperinflation.

Thank you, sir.

I am glad to be here. As for your recommendation about others reading me, i am most humbled by the suggestion. I do the best that i can. It is hard work, as you probably know very well. Novices grabbing introductory trading books will probably suffice for them in the time being.

Good hunting to you.

P.S. just jumped to your thread on hyperinflation...liking it already.....

[sheesh]

Entropy, thanks for posting. I know WMD and his way of analyzing price is excellent.

Other learning sources I'd recommend are http://www.nobrainertrades.com/ and Sam Seiden's videos on FXstreet.


That being sad, staring at charts for 8 hours or more day in and day out will wear you out in the long run, therefore I'm focusing more and more on swing trading even though it is not as profitable for me. Trading for a living is one of the hardest things to do and can seriously fuck up your health and social life.

[Caligula]

This is great, thanks for sharing Entropy.

[Entropy]

(02-06-2012 07:58 AM)sheesh Wrote:  

Entropy, thanks for posting. I know WMD and his way of analyzing price is excellent.

Other learning sources I'd recommend are http://www.nobrainertrades.com/ and Sam Seiden's videos on FXstreet.

Thanks for those two recommendations. I am familiar with them. I read his entire thread on forexfactory(aka FF). devour sam seiden's videos too...that is when i first came across "supply and demand zone", instead of the traditional S/R levels. Others that i found useful on FF were james16, jackos, danuk, greame's nightmoves, razorjack, saxon, those were great threads on FF. Like i said before, you can find almost everything for free. Of course, it is hard work.
P.S i was permanently banned from FF for posting pics of hot chicks with my trades. oh well.

(02-06-2012 07:58 AM)sheesh Wrote:  

That being sad, staring at charts for 8 hours or more day in and day out will wear you out in the long run, therefore I'm focusing more and more on swing trading even though it is not as profitable for me. Trading for a living is one of the hardest things to do and can seriously fuck up your health and social life.

I hear you, man. I do take breaks away from trading every now and then. What is interesting is when people come into trading business with the attitude of easy money in shortest amount of time. No pain, no gain.

(02-06-2012 11:38 AM)Caligula Wrote:  

This is great, thanks for sharing Entropy.

Thanks, man. Contributions are welcome.

[Entropy]

Excerpt from trading journal:razorjack

I'm sure everybody on this forum knows who George Soros is, but does anybody really understand how he trades?

BTW, in case you've been in a coma for the last 2 decades and don't know about George Soros, I suggest you do some research.

George Soros has a very complex way of looking at the economy, however you can break it down into one simple method.

Here is the idea, first determine what kind of state economy is in and then likely scenarios that may occur in the near future. From this, you can determine how the markets "should react" in each of these likely scenarios.

The reasons why I say "should", is that markets don't always react rationally.

And this is exactly what George Soros looks for. He will look for irrationalities in the markets, exploit it and then wait for the economical forces to move the markets back into the "correct" direction.

One example of this was the great IT bubble that burst in 2000-2001. There was so much euphoria around tech stocks and options, there was a feeling of no end to the uptrend in sight. However the shrewd trader would have realized that tech stocks for companies showing no profits at all were being pushed up to record levels and eventually it will be time to pay the piper.

So in this particular case, George Soros would have ridden the trend upward along with everyone else, but the whole time being aware and prepared for the recoil. So not only did he make money in the uptrend, but he made a killing in the crash that came afterwards.

Here's an example of how I use this knowledge in my trading.

In the beginning of Oct '09, we saw major weakness in the USD and at the same time alot of strength in AUD. Commodities were in a strong uptrend, with China leading the world in economic expansion. The market consensus was that the RBA would raise interest rates in November or December '09. Two days before the RBA rate announcement, the department of labor was releasing NFP numbers. The market consensus for NFP was at -179k.

AUDUSD was hanging just underneath the long term trend line that started in March '09, so I knew there was a good opportunity depending on what the NFP numbers were and if the RBA decided on an interest rate hike.

So what happens? NFP numbers were at -263k, much worse than expected and AUDUSD shoots down over a 100 pips in a matter of minutes! I knew that this was an "irrational" reaction. I assume that this was a tactic by large institutions initiating hedge programs and/or creating a market to unload shorts and / or to load up on longs.

So what did I do? I went to town! While AUDUSD was dropping like a rock, I put on as many long orders as I could get in! Then 25-30 minutes later the AUDUSD stalls on the down swing and I'm still loading on more orders, then starts to slowly head upwards.

AUDUSD then takes off more than 200 pips upwards picking up all my orders along the way. I had planned to hang on to my orders over the weekend, anticipating RBA rate hikes.

I had already made a substantial profit from NFP, but I knew that there was still another opportunity coming. Basically I had nothing to lose and everything to gain. There was very little chance of the RBA lowering rates. If the RBA left rates alone then it's what the market was expecting, no negative reaction. But if the RBA did raise rates then AUDUSD would make a substantial move upwards.

So on the big day, 30 min before the RBA rate announcement, my orders from the week before are already in profit and I put on more long orders above the price, leveraging my open profits, in case the news was good.

So what happens? There is a rate hike of 25 basis points! The market picks up my orders and I wait. The best part? I'm in with my orders 4 hours before the London session and 10 hours before the New York session!

This is what I mean by getting in at the beginning of a new swing slightly "ahead" of the market.

Anyways, AUDUSD continued in an upward trend for another 8 weeks. Even though I left quite a bit on the table, I still managed to make more on this trade alone that most make over several years.

[Entropy]

Excerpt from trading journal:razorjack

A proper analysis doesn't make predictions, a proper analysis makes anticipations. There's a difference.

You missed several important parts from my previous reply:

1. First I told you, that you need to look at a longer period at least 6 months. If you look at only the previous week, then you will get a very limited picture.

2. What you want is a list of scenarios, each with different economic conditions and how the currencies will react in those situations. You only listed one outcome from one scenario.

Let me see if I can give you an example, instead of looking at a specific pair, look at the overall economy and what it is telling you. What are the biggest events happening right now?.............

Which countries will be impacted by this?

In terms of CHINA.....This is where you need to understand the kind of economy China has and how it is linked in to the global economy. I'll give you a couple of hints, but you need to do your own research on this to get a full understanding.

China is in the midst of a credit fueled boom since early 2009 and has been a major consumer of commodities. Tightening of credit may have an impact on the demand in commodities and thus currency pairs like AUD, NZD and CAD.

Instead of looking at the economic data this week, you need look at the big picture. The big picture tells us that this event in China will either cause risk aversion or risk appetite. We've seen risk appetite through out most of 2009, with China's booming economy clearly a driver of risk appetite.

So there's a good chance that this will cause continued risk aversion until it is clear to investors that credit tightening will not have a major impact on economic growth.

Note that I am not predicting this will happen, I am anticipating both risk appetite and risk aversion, I will be ready to trade both ways. However I believe that risk aversion is the more likely scenario.

What you need now is some more research on how money flows in times of risk aversion and in times of risk appetite.

Here's a little clue: The last time we had risk aversion was around Nov 25-27 '09 during the Dubai debt crisis, take a look at your charts to see how the different markets reacted. Then ask yourself why the different currencies reacted the way they did.

We had risk appetite through the majority of the time between March and Nov '09. Look at how the currencies reacted and research why.

Now based on what I wrote, why don't you reply with what will happen to EURUSD if we have risk aversion and what will happen if we have risk appetite.

China's development and progress has been pulling the rest of the world out of the financial crisis and China will therefore exert a great influence over the next few years. Anticipating what will happen with China and it's economy will go you a major advantage in trading.

This seems like a lot of complicated work, but necessary as the different economies will be impacted differently in different market conditions. For example economies have reacted the way the have after the financial crisis due to the global conditions, once these conditions change so will the impact on different economies.

[sheesh]

ForexFactory is actually one of the better trading boards.

Generally speaking, you don't need to spend one penny/pip on trading courses, everything I learned is available on the www for free. The light really came on when I discovered Sam Seiden's zones.

You trade for a living, Entropy ?

[Entropy]

Excerpts from trading journal:dazzdude.

Using COT data for futures analysis. extrapolated to spot currencies.

Every now and them, COT data shows some rare opportunities that may only occur once every few years. There is a lot to explain if you have not studied COT data, but multi-year extremes are one such an occurrence and we have this now. This may be an opportunity for the followers of this method (and amazing thread) to get some legs growing.

For example, when the commercials (the BIG SMART money) are 'heavily' short, and large traders (mainly funds – they get extremely long at market tops and extremely short as market bottoms as they are trend followers and typically ride the trend to the end, adding more as she goes) and the public are 'heavily' long it says something.

However, the raw numbers must be taken "in context" to the current market phase and everything is relative. Some examples:

1. Being heavily short may not be determined by an 'absolute' number, but by comparing current data relative to prior data. For example, a slightly short stance in the market could be considered heavily bearish IF relative to the past 6 months, it was the shortest position held.

2. Positions (COT data) is contextual to the trend. Let me try explaining by example. Commercials have very deep pockets. They can ride out the market swings, buying into dips (or down trends) and selling into rallies (or up trends). They are not planning business activities days ahead, but weeks and months ahead. Think of a commercial using currency as a "tool" (they are not “speculators” in the same way we are). They use a currency like I use petrol. If I need petrol, I have to buy it regardless of the price. If I was a commercial entity, I may have 50,000 litres ready to use, so if prices are high, just wait til petrol gets cheaper and then "top up" or do most of your buying at a more favourable price. Also, if prices are low, just keep accumulating petrol at a good price. If it drops some more, that’s fine, buy some more. If petrol was a dollar a litre and it went to 95c, that’s great, buy up! Goes to 90c, still great, 80 cents, fantastic! Buy more (my pockets are deep). I am just using petrol as a “tool” and the fact that it is now 80c does not mean buying it was 90c was “bad”. 90c was great, 80c even better! However, for a speculator (public) it’s a disaster! I am not using petrol as tool. I am buying at 90c hoping it will to up to 1.10c and then I will sell it back into the market. Why is this important? You need to think like a commercial when looking at COT data before it makes sense. NOW FOR THE IMPORTANT PART. Why would a commercial entity with massive pockets buy petrol when prices are relatively high (even then, this would in a pullback on a weekly up-trending petrol price)? For ONE reason. Because they believe it is going higher! Therefore, by FAR the BEST and MOST RELIABLE way to look at COT data is when a currency is being accumulated by commercials at high prices (typically still in a pullback) and when a currency is being distributed by commercial traders at low prices (typically in a rally). This matters a LOT. I ONLY take note of heavily commercial buying (in a pullback) in a longer term up trend or at major (weekly/monthly support/resistance levels, trend lines, etc.). Vice versa for heavily commercial selling.

3. Commercials spend a few weeks heavily accumulating (at least month - as Graeme says - 4 or more [weekly] bars) and price is consolidating/stalling. Which way do you think the breakout will be? Long maybe? Where was the BIG SMART money expecting prices to go?

There are more things to consider, but that is the basics.

So, what about "multi-year" extremes? Holding the most short or most long positions say in the last three or four years? Wow, that does not happen every day! Even better, when some long term element on trend is your favour or price is against a major support or resistance level?

Take a look at the following charts. It may serve you well to take a good look at them, but remember to place the COT data into "context".

Sorry for the long post. I really hope someone finds this useful

Note:

A. Yen, look at that agressive buying (invert for spot - so selling) into HIGH PRICES (low for spot) prices. Rare.
B. Look at the pound. Massive short positions -most short since 2007.
C. Similar for euro.
D. With dollar index, just pointing out that the usd should strengthen against yen, pound, euro (adding fuel to the fire).

[Entropy]

Excerpt from a trading journaL:dazzdude

Almost all commercial futures currency contract buying and selling (measured as Open Interest) is indeed hedging, for the reasons you have pointed out. Thank you. I was painting a metaphor only. A crude picture at best. After describing COT activity to folk in the past, I discovered that my petrol metaphor was easily digested and from there, understanding grows.

Can futures/options commercial OI accurately reflect likely commercial spot activity? I think so.

It helps to place the data into an oscillator equation (like a stochastic or Williams %R). This provides a relative perspective on the current data to prior data. The look back can be 3 months for a short-term outlook, 6 months for medium term and 3 years for long term (looking for multi-year extremes). The pictures posted used a 3 year look back. It can be a deceptive perspective though.

Are large traders typically good to follow? Let’s have a look.

Let’s use a 3 month look back on the pound. 3 month and 6 month look backs are the most useful, I find.

I have marked of optimal times to be long (green line) - Smart money should be LONG at these points - and optimal times to be short (red line) - Smart money should be SHORT at these times.
What are the large traders doing at these times? What are the commercials doing? And the public (me! – my gosh, that’s depressing and explains a lot J)

To my eye, the commercials, for the most part, appear to be in sync with the ebb and flow of the market. To my eye, the large traders “pattern of speculation” appears only marginally better than the public, who like to get long at the highs and short at the lows. This is not a “pattern of speculation” that works for me. Are they sometimes right? Yes. Are the usually right? The evidence does not suggest this to me.

I guess the real question is - Why does the collective commercial hedging activity increase or decrease, long and short? This discussion could go deeper, though I am apprehensive to do so (not my thread).

I have established two little PE-legs that I hope survive, thanks to this wonderful thread. Short Yen and Pound. The market looks “ripe” to me for a long term move, over the next few weeks/months. Time will tell I guess. I am after all, representing the "public" COT data (gulp!).

Again, thanks for your correct clarification.


Summary: When would I deploy my solders into the battle field?


1. At multi-year (three year look back) extremes in commercial activity.
2. Commercials heavily long in a weekly uptrend (generally in a pull back or congestion) (3 or 6 month look back)
3. Commercials heavily short in a weekly dntrend (generlly in a pull back or congestion) (3 or 6 month look back)


My research suggests that at these times the chances of legs surviving are greatly enhanced.

Other things can come into play, such as "valuation" as compared to US treasury bonds and gold, with similar effect (especially if they happen, at the same time).

Edit: Just to clarify (to paint a fuller, more correct picture), just because an organisation hedges, does not mean they are a commercial. They could be hedging, but still considered part of the public. Why?

http://www.cftc.gov/MarketReports/Co...otes/index.htm
Commercial and Non-commercial Traders: When an individual reportable trader is identified to the Commission, the trader is classified either as "commercial" or "non-commercial." All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z).

http://www.cftc.gov/foia/fedreg04/foi040512a.htm
But what are the requirements to be required by law to report trading activity?
------------------------------------------------------------------------
Commodity Number of contracts
------------------------------------------------------------------------
Financial:
Major-Foreign Currencies......................... ...... 400

What does that mean?
Unless you hold 400 or more full contracts/lots - that's a lot of contracts (I actually think this number has gone up higher), you do not need to report positions to the CFCT. If you do not need to report to the CFCT, then you are placed into the "public" bucket, EVEN IF YOU ARE HEDGING FOR COMMERCIAL reasons. Hence, only the big boys are truly commercial traders, from the COT point of view.

[Entropy]

(02-06-2012 05:29 PM)sheesh Wrote:  

ForexFactory is actually one of the better trading boards.

Generally speaking, you don't need to spend one penny/pip on trading courses, everything I learned is available on the www for free. The light really came on when I discovered Sam Seiden's zones.

You trade for a living, Entropy ?

you are quite right. I came across sam seiden's on nightmoves' thread.

On trading for a living?
By the rate things are going, at the end of the year, i should be using trading as my sole income. It is already my main income(it beats the earnings from my science job). So far, so good, the goals are on track. I am not comfortable using trading exclusively until i am over the $500k mark.(yes, i know, you can trade for a living using 50K or 100K. For whatever reason, my psychology cant tolerate that. I need over $500k to personally be comfortable enough to quit my science job which pays handsomely enough.). Unless major shit happens, this is the year for me.

HOW ABOUT YOU, MR SHEESH?