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Trading for a Living

Psychological Indicators

A trend continues to be in trend when two groups of people have a conflicting opinion on a stock. 

 

There are several newsletters which rate a stock but are no better than the average traders because they become bullish on major tops and bearish on major bottoms.

 

To understand a group of persons, we should first understand what they want. In general, financial journalists want to appear serious, informative and intelligent. The author says that internal contradiction is the main reason why financial journalism has not succeeded. They always want to present a “balanced picture” which is not ideal for an investor who wants to make an investment decision based on that report. 

 

Financial journalists can be misleading and don't provide an advantage to a particular investor. For example, when a journalist reports a new trend, that report is read by a lot of people, major buying and selling happen and that trend disappears.

 

Commitment Indicators:

Traders have to report their trades in certain levels to a respective trading commission of that particular country. These levels are called reporting levels. For example, CFTC or Commodity Futures Trading Commission set up the maximum number of contracts a trader can execute, which is also known position limits.

 

The CFTC has divided all market participants into three groups:

 

  • Commercials - Also known as Hedgers, these are firms or individuals who deal in actual commodities and trade futures to hedge their business risks.
  • Large Speculators – Large speculators are those traders whose positions reach the reporting levels. 
  • Small Traders – To calculate the position of small traders, we need to subtract the holdings of commercials and large speculators with open interest.

Commercials have the best track record in the futures market as a group, simply because they have insider information.

 

An approach has been mentioned by the author known as the COT or Commitment of Traders Index. This index can be used to analyse the commitment of traders. When the COT index rises above 90%, it shows that commercials are uncommonly bullish and signifies a buy signal.

 

Odd – Lot Activity:

Odd lotters are people who trade less than 100 shares of a stock at a time. They are also known as value investors and represent a small percentage of the whole volume traded in the markets. The Odd – Lot Sales Ratio or the Odd – Lot Short Ratio were indicators which were used to show the behaviour of odd lotters but have lost their value after the financial markets changed during the 1970s. 

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Units 14/17