FTSE Down Since Thursday

[Nelsy-Boy]

I saw a Tweet from DailyFX showing a chart with the caption 70% of traders are net long the FTSE. That was on Wednesday 3rd October. Since then, the candles speak for themselves. Can someone shed some light on why such headlines prior to this recent drop.

[Caseynotes]

Hi @Nelsy-Boy, there is a surprising amount to unpack there but will concentrate on the main point. You are referring to the DailyFX Sentiment strategy which goes along the lines that as 80% of retail traders fail then 80% of retail traders must be wrong most of the time. So if 70% of retail traders are long the FTSE it is a bearish signal and you should be thinking in terms of the FTSE going lower, which it did.

See the chart below, 90% of retail traders are long in gold so that is a bearish signal. 79% of retail traders are long bitcoin so that is also a bearish signal.

Not particularly encouraging is it, especially as the stats back the signals.

[Nelsy-Boy]

Thanks for the insight caseynotes. 

[Guest PandaFace]

Don’t forget that when traders close their positions it also causes pressure on the other side of the trade. 

For example if 90% of clients are net long, then closing the trade is actually selling and giving sell side pressure. A lot of people forget this. There’s also an argument that if some are going to close, some will go straight into a short trade doubleling that movement. 

The only trade net long Can do is reverse the trade to close and therefore push the other way.

[Nelsy-Boy]

Thank you for the extra info PandaFace. I wonder if that has helped recent selling as the longs have been closing out big time this week.