Smart Money’s new Multi Year Short Position.. #forex

Each week, the Commodity Futures Trading Commission (CFTC) publishes a report known as the Commitment of Traders (COT). In this report, information on long and short positions held by three groups of traders can be found. (Commercial Hedgers, Large Speculators, and Non-Reprtables).

Commercial Hedgers, more commonly known as ‘Smart Money’ Hedgers
Large Speculators, Funds, Investment Banks, etc
Non-Reportables, Individual Traders, small funds, etc

Depending on your trading strategy, knowing the exposure held amongst these three groups of traders can help determine future price moves.

In this article, we are focusing on the ‘Smart Money’. When the Smart Money Hedgers have reached an extreme, (current exposure held, same as 3-5 years prior) we consider this to be a notable event.

Smart Money Hedgers are good at what they do, there is no doubt about that, they have an excellent track record of ‘getting it right’ most of the time. But in order to trade off the back of Smart Money’s positioning, we need to understand a few basic things.

First things first. The data within the COT report is NOT a buy or sell signal, it’s more of a broad outlook at how the three groups of traders are positioned. For example, if a trader is long on a particular asset and is intending to hold his/her position for the medium term (up to 12 weeks) it would be helpful and useful to monitor what the large speculators are doing as they are trend followers. The Smart Money on the other hand uses a very complex strategy, they hedge their positions and lock in prices along the way. At Bottomcatcher we take note of the exposure held amongst Smart Money Hedgers once they have reached an extreme as they tend to influence the markets and steer it at extremes. So in this case we would be looking for turning points.

Once an extreme position has been established, in this case, the Smart Money is ‘Short’ the Swiss Franc (CHF), we then have the challenge of getting the timing right. (Hence, the COT report is NOT a buy or Sell signal provider). The timing of a change in direction (turning point) can vary from days to months, on average it’s about 3 weeks. By plotting a 200 period daily moving average on a chart can help us determine when to get into position.

A good example of this is shown in the above chart, in particular on 20/05/2014 when the Smart Money was heavily Short. It finally broke below its 200 daily moving average on the 17th July 2014 some two months later (that would have been the sell signal) and continued to decline 14%. Other times whilst holding above the 200 daily moving average, Smart Money Hedgers managed to drive the CHF down somewhat, at the very least capping further upside for the medium term against its peers, which may well have been their intention.