In This Episode
- Oanda position ratios
- Commitment of Traders Report
- How to tell which market could be the best fit for your personality
- When to go with the trend and when to trade against the trend
How Get Started with Trading Crowd Psychology
Understanding your own personal psychology is the most important thing in trading. But it's also very important to understand the psychology of other traders in your market.
Since you can only make money on a trade, if other traders are wrong about that trade, it helps to know where the “smart” money has placed their trades.
In this episode we talk about how going against the crowd has advantages, and how going with the crowd can also have advantages.
Also, Hugh shares why the COT report never worked for him. Walter shares why he feels that stock traders and real estate investors have something in common and which types of personalities tend to do best in those markets.
Read the Transcript:
Hugh: Hi Walter. Something I learned early on was that the crowd is usually wrong. There are a lot of books about this and I think I was kind of wired to do that. Naturally I kind of like going against the crowd or whatever but I want to hear your thoughts on mass psychology, psychology of crowds and how you use that in trading.
Walter: I think you're right by the way, your approach. A lot of people watching this, a lot of traders I think are contrarian by nature. They're drawn to trading that way. I do think however there are certain asset classes. So if you're a futures trader, if you are a currency trader, if you trade CFDs which are illegal in the US but in England or Australia or New Zealand you can trade them.
You probably have some contrarian bet, probably. If you are investing in real estate, if you're investing in shares or stocks, there's a chance that you're on the other side; that you're more of a social proof. So everyone should look up social proof, that's the cognitive bias. You want to pay attention to when it comes to this.
I saw somebody the other day; I think it was on Twitter. They posted a thing. I don't know who she was; I think she was like some actress or a reality star. I literally don't know who she was but apparently she was famous and it was a video. This guy was talking about how stocks were going to rally and stuff. She was clearly not like that wasn’t her game.
The guy was like, “That's it. S&P 500 has reached the top” because so and so has claimed that it's going to go you know further winner. So he was making the contrarian point know which is what I like to do. One of the things you can do and sometimes people fight me on this but I would encourage you to look at the data.
The easiest way to look at the data is to get an account out of Oanda. We can put the link in the show notes and at Oanda, you will have access to their tools. They have really cool tools there. You can map out the open position ratio which is just a fancy way of saying the percentage of traders long or short a currency pair.
You can map that against the actual price. You can go back at least a year probably even further; I think you can zoom out further anyway. What you will notice is a very interesting phenomenon which is, as more and more traders sell the EUR/USD for example; selling Euros, buying USD.
As more and more traders as a percentage, when that gets really high like seventy, seventy-five, eighty, what you will notice is that the EUR/USD will tend to go up. Don't shoot me for it. I'm just the messenger. I'm just telling you this is a very valuable tool. Is it foolproof? No. Is it always that case? No.
All I'm saying is that if you have two things, If you have a chart that you look at and it looks like it's trending and you can bring over your seven-year-old. Point to the chart and say, “Hey,” — put it on a line chart — “Is it going mostly up or mostly down or is it just going up and down, up and down?”
Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.
At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.
So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.
Walter: If that seven-year-old can tell you that, that's a trending chart and the open position ratios are flipped, so if the EUR/USD is going up making higher highs, higher lows and the open position ratio shows you that seventy, seventy-five, eighty percent of the traders are selling the EUR/USD that's a pretty strong trend.
I would count on that trend breaking through resistance and to keep going higher. Of course the opposite is true as well. Now what you want to do is find a good broker that has these.
The best one I found is IG Markets. They have a big chunk of the retail market. These are retail traders. They're not funds. They're not pros. They're the people that we’re trying to take money from; our fellow retail traders. Those are the traders that you'll see at Oanda; Saxo Bank; IG Markets. There's lots of them out there.
I think even Dailyfx or certain news websites; I don't know if FXStreet does it. I don't think it's retail traders. I think it's their experts or something. So that's what I like to use, and that's a contrarian point of view.
We don't move the market; we're very small retail traders. A very small percentage of the currency markets and our broker is really participating in the real markets; we are sort of trading like an image of it. I think using the crowd as a gauge for the strength of trends can be very valuable. So that's one way to do it.
Just look at the open position ratios and look up social proof. Look up all the cognitive biases. See how those are and social proof is the one that really is basically this idea of if it works for everyone else, it should work for me. If my uncle keeps flipping double-wide trailers in Alabama, I can flip double-wide trailers in Alabama or whatever you know.
My friend keeps buying Apple and Tesla stock, I should do the same thing; that's social proof and so that's what makes a trend happen and that's what makes a bubble happen. Sooner or later there's no more crap. There's no more fuel. If everyone's flipping double wide trailers in Alabama, pretty soon there's no one left. There's no more buyers.
You just have to be aware of that and so that's one thing I would encourage you to look at. It's an empirical question which is, do open position ratios tend to be inversely correlated with the trend of the movement of the market? The answer is a clear yes. Like I said, don't take my word for it. Have a look yourself.
Hugh: I've tried looking at the commitment of traders in the futures market that really didn't work for me. Have you looked at that?
Walter: That's interesting. I was actually hoping you bring that up. For me the problem is, it didn't come out. I think it comes out weekly; last I checked it was weekly. So what Hugh is talking about is different. That's the pros and that's futures. We're in spot retail Forex. It's a little bit of a different market but I think that could be useful.
If you were like long-term position trading maybe like you know weekly charts or maybe some sort of daily. I haven’t been able to make that work either. I have to admit though I didn't have high hopes for it because it didn't give me enough data. If I go to IG Markets every ten minutes, they're going to refresh the open position ratios. If I go to Oanda every fifteen minutes, they're going to refresh the data. So it's a little bit better data. Do you know what I mean?
Hugh: Yeah, otherwise it is just too lagging.
Walter: Yeah, exactly.
Hugh: Okay, cool. Thanks.
Walter: Thank you.
Hugh: All the information in this podcast is for educational and informational purposes only, and is not trading or investment advice.
SHOWNOTES:
Enter the Monthly Contest
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The giveaways can include books, coaching sessions, trading tools, or surprise gifts.
It will usually be something that will help you improve your trading psychology.
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