SSI, Why Traders Lose

[Caseynotes]

1  -  Doubling Down.

2  -  Holding Losers.

3.  - Trying to Pick Tops and Bottoms.

I started discussing the SSI and COT data in the Indices thread but I want to encapsulate and collect the basic points together to show the main reasons why retail traders fail.

Using the Dow as an example, so retail traders went net short starting 2nd Jan (pic 1) which coincided with the rally failure in the recent down trend, fine (pic 2).

But the pullback reversal itself failed on the 8th Jan, the bears had had their chance and blown it, time to get out of those shorts right, the chart had turned bullish. But the % net shorts kept increasing all through Jan and stayed net short 75% - 80% all through Feb while price was storming up the chart. Then holding on to losing trades all through the March consolidation.

Retail had got it wrong so initially doubled down and then hung on to the losers. 

Look at the 3rd pic which shows the COT data for the same period. Small speculators went net short 2nd Jan same as above. Large speculators on the other hand had been reducing their net longs but come the start of Fed were confident enough to set about increasing their long exposure again.

Back to the top chart again. The consolidation through March and maybe those losing trades would come good right? That's desperation tactics not a planed strategy. 

But look again, in the last week there has been a price run up to test the recent high, what does that mean for retail, why it's another opportunity to go short again of course, I mean it must be the top this time right?

80% of retail traders lose money for a reason (or 3). It used to be said that 90% of retail traders lose 90% of their account within 90 days.

The SSI graph show exactly how this is remarkable accomplishment is achieved by so many.

 

 

 

 

 

[Caseynotes]

Aha you may be thinking, but that's just dumb indices retail traders, FX retail traders know their stuff.

Take a look at usdjpy.

The absolute precision in which long traders who were buying all the way down bailed (at the very bottom), and where short traders started selling (at the very bottom).

That's not pure luck. To buy high and sell low with such precision must take as much work as doing it the right way around.

This SSI chart is using US time zone. See how it looks in GB time in the 2nd pic/

[Caseynotes]

A look at recent Dax. Always take your lead off the daily, it's clearly uptrending so you are only looking for opportunities to go long if you are not trading intraday.

On 22nd Mar price broke down past the recent low and the SSI tells us retail started shorting (A), bad move.

Don't drill down time frames looking for indications to short because you will always find many, it doesn't matter what your indicators say when the daily is still in uptrend, wait first for the daily to signal trend change by not only putting in a lower low but a lower high as well, then you can look to the lower time frames.

Indicators only indicate possibilities, stamped candles are reality.

To rub salt into their self inflicted wound retail continued to run shorts all the way up (B) until they finally puked at C.

It's the same story over and over, trying to pick tops and bottoms, doubling down, holding losers.

Don't bother with bias, you can always find something on the chart or an indicator to support it no matter how wrong it is. Just read the chart and let it tell it's own story.

 

[Guest Punter]

As said before 

Losing rate last quarter 76 previous 81

?!

[Caseynotes]

Quite right @TrendFollower,  for retail traders the higher time frames should be a filter, if you are going to run against them it can only be for a short distance and you had better be constantly looking over your shoulder. So if you are intending to be in a trade for more than a day it's pointless trying to short a high in a uptrend or go long on a low in a downtrend and yet that is what started the downfall in every one of the examples above.

It seems to be a lesson never learnt, it's always 'this time will be different' and it nearly always never is. If retail could stop that one bad habit it would make a massive impact on the '80% of retail traders lose money' statistic.

That was the main reason I brought up the SSI data. Yes the SSI data can sometimes be used as a contrarian signal, that if (as now) 75% of retail are short the major US indices then maybe long is the way to go but sometimes the crowd is right and so like any signal it needs to be considered against other data.

More importantly though is that the SSI data shows exactly when the crowd choose to go long or short and comparing that to the chart you can see exactly what's going wrong. They are repeatedly mistaking pullbacks for tops/bottoms. Pullbacks are a natural component of a trend but retail traders, because of a lack of experience, tend to cover their chart in lines and indicators so that every price twitch is going to trigger something and the move takes on unwarranted significance.

As has been demonstrated in the posts above, retail are constantly getting caught out and trapped trying to call the top, then digging deeper instead of just getting out, and finally being forced out with large losses. A chart can be read but a market can't be known, no one really knows what's going to happen tomorrow. The best course of action is to expect continuation until the chart demonstrates that a change has occurred and then look to decide what it's changed into, if it's a new trend climb aboard at the next pullback.

 

 

 

[Caseynotes]

Here is the Dax SSI chart from the post above moved on 1 week and highlights the precision that longs bailed having been buying the whole week from the 20/03 all the way down to the bottom at 11400ish. And that's where the sellers stepped in to start selling all the way back up to 12000. err.

Standing back the overall chart is undoubtedly bullish and really retail traders should have only been looking for dips to buy, that's it. A fair majority of those 74% holding shorts must now be well underwater and hoping for a miracle.

Institutional traders are looking at this, if they want those short contracts for themselves they may well try a stop run and then buy them all up, if they want long contracts instead then they are just going to run the stops over anyway. 

 

[Caseynotes]

Let's take a look at oil, surely oil traders know what they're doing.

On the chart (bottom pic) after the triple retest of support at 51.40 in mid Feb oil went on a bull run, went side ways late Feb then up again til late March stopped at 60.30 ish.

The SSI data shows retail went net short late March, the top was in ... but there were no lower lows, in fact support around 58.25 looked strong. No matter what, the short play was busted by the start of April which funnily enough was when retail really piled in short while long positions stayed flat, this pattern continued to the present.

Trying to pick tops, doubling down and then holding onto losers when the chart was really telling you to buy dips all along. 

[Caseynotes]

Can you 'Pick the Top'? Ok, off you go;

 

[dmedin]

Where do you get access to data on net retail clients positions?  

Edited May 13, 2019 by dmedin

[Caseynotes]

11 minutes ago, dmedin said:

Where do you get access to data on net retail clients positions?  

On the IG web site when logged in and search a market the info is there as well as related positions. Below is the related markets to Dow.

 

[dmedin]

There seems to be a slight element of, 'since most retail investors are losers, go against the majority' lol!  I had a good experience of this lately speculating on Intel, which was over 90% long at one point and has been selling off heavily.

[Caseynotes]

15 minutes ago, dmedin said:

There seems to be a slight element of, 'since most retail investors are losers, go against the majority' lol!  I had a good experience of this lately speculating on Intel, which was over 90% long at one point and has been selling off heavily.

That's correct, it was devised as a contrarian indicator though the crowd aren't always wrong.

https://www.dailyfx.com/sentiment 

[dmedin]

Caseynotes, I would love to know what you think about this statement?  (Apropos of mass psychology, self-fulling prophecies etc)

The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.^[37]

https://en.wikipedia.org/wiki/Robert_Prechter

[dmedin]

I have to admit that I personally find the Fibs essential!

If it works, does it matter whether it's a 'legitimate' theory or not?

Edited May 16, 2019 by dmedin

[Caseynotes]

2 hours ago, dmedin said:

Caseynotes, I would love to know what you think about this statement?  (Apropos of mass psychology, self-fulling prophecies etc)

Yes, I can see what they're saying, even most EWP peps will admit that you will get 10 different EW charts if you ask 10 exponents to draw one up. When I looked at it when starting out my thoughts where exactly that, that it was just too loose and too open to multiple interpretations which is why I drifted down the S&R route though looking at Fib along the way. Definitely more traders use Fibs than EW which helps to make Fibs more of a self fulfilling prophecy but as I mentioned elsewhere I found pivots and S&R to be even more so. 

[dmedin]

I recently found that when drawing Fibs, the percentage lines are excellent support/resistance points, better than I could do myself without them.  Interesting that they can be used independently of full-blown EW which I find difficult to get my head around at this time.

Edited May 16, 2019 by dmedin

[Caseynotes]

The S&P has it made new all time highs but we see retail traders keep doubling down and go increasingly short as the market keeps going higher (IG clients currently 78% short). We have also seen on this forum people so wedded to their bias they can stand no dissenting view, get hostile if anyone dares to suggest their bias might be wrong and who will hold with being wrong for months and even years on end.

In light of the above I refer back to this thread which looks at why most traders lose (see OP) and the number one reason is that retail traders think they are supposed to be picking turning points (tops and bottoms). Though some experienced traders can make a living doing just that most retail traders are just chucking darts no matter how much hopeful confluence to their bias they manage to mangle out of contorted technical analysis.

Instead of looking for turning points you should be looking for continuation points. Price approaches a significant level, fine, let's see what happens.

Price breaks a level, retests the level then continues on with the break.
Price has turned at a level, goes back to retest the level then continues the reversal.
Price is trending then attempts to reverse which fails, becomes a pullback and then continues the trend.

The retest of a significant level does not need to actually tag the level again but there should be some attempt and clear failure to do so when price then turns to continue on.

You are looking to hone that skill to call it right about 50% of the time, the stop loss is just behind the significant level because if the level does get taken out your idea will have been proved wrong. And so long as the take profit average is more than the stop loss average, and you are right 50%, then you will be profitable. 

So in essence you are looking to ride with the market movers rather than trying to second guess them. And so what does your bias have to do with all this? Absolutely nothing, in fact it's worse than nothing because bias acts like a back seat driver constantly giving directions with no immediate reference to the actual road ahead.
 

[andysinclair]

4 hours ago, Caseynotes said:

The S&P has it made new all time highs but we see retail traders keep doubling down and go increasingly short as the market keeps going higher (IG clients currently 78% short).

I'm currently looking at how sentiment moves with various markets.

Here's confirmation of how clients go "against" the market. The orange line is the S&P 500 over the past 2 months and the blue line is client short sentiment.

As the market goes higher more clients go short, when the market drops more clients go long.

Interesting to see that over the last few days clients have scaled back on short positions as new all time highs are made...

[Caseynotes]

4 minutes ago, andysinclair said:

Interesting to see that over the last few days clients have scaled back on short positions as new all time highs are made...

yes, getting tired of repeatedly being stopped out 🙂

[Caseynotes]

20 minutes ago, andysinclair said:

I'm currently looking at how sentiment moves with various markets.

Here's confirmation of how clients go "against" the market. The orange line is the S&P 500 over the past 2 months and the blue line is client short sentiment.

As the market goes higher more clients go short, when the market drops more clients go long.

Interesting to see that over the last few days clients have scaled back on short positions as new all time highs are made...

This will probably astonish most followers but doesn't surprise me as I follow this regularly, most just see occasional snap shots and think retail traders are temporary out of sync but it's a continuous phenomena, when the market goes down shorts decrease, longs increase, when the market goes up shorts increase and longs decrease. 

The reason is, as above, they are constantly trying to pick tops and bottoms and repeatedly get it wrong.  

Edited November 5, 2019 by Caseynotes

[phillo]

https://www.youtube.com/watch?v=eTcl7Ej4UIs

[andysinclair]

Thought I would look at Bitcoin client sentiment due to the recent price volatility.

In the chart below, for the past 2 months, the orange line is the price and the blue line is % IG clients with long positions:

Towards the end of October Bitcoin moved up towards $10,000 and IG clients responded by decreasing long positions. Then as bitcoin has moved down through November an increasing number of clients have gone long.

Again, we see the inverse effect, as the market moves higher traders go short and as the market moves lower traders go long.

It appears that not many IG clients are trend followers! (FYI: @TrendFollower)

[dmedin]

Reason number 10: they actually try to trade instead of making money off videos, books and talking about trading in general (being a guru).

The more you trade, the more you lose.

[Caseynotes]

5 minutes ago, dmedin said:

Reason number 10: they actually try to trade instead of making money off videos, books and talking about trading in general (being a guru).

The more you trade, the more you lose.

Retail traders for their own protection should be barred from live trading until they have at least 3 years live trading experience ... errr 🤔 

[Caseynotes]

Looks like DailyFX are re-vamping their IG client sentiment (market positioning) pages to include a time period chart as well as the snap shot so similar to the way FXCM does it. This makes it easier to track changes in IG client sentiment.

Hover mouse over a market to highlight it and click a then click on chart. Not all markets available as yet.

https://www.dailyfx.com/sentiment

 

[Caseynotes]

Video featuring IG Client Sentiment data;

 

[dmedin]

So what happens when the majority of IG clients are right, for example when 90% of them are long on gold or long on Greggs and the price does indeed go up?

[Caseynotes]

9 minutes ago, dmedin said:

So what happens when the majority of IG clients are right, for example when 90% of them are long on gold or long on Greggs and the price does indeed go up?

yes occasionally they are on the right side but having watched these stats for many years the most common story is that retail traders go long as price falls and go short as price rises. This phenomena is more easily seen on the period charts and is easily missed using just the snap shots.

The research is thorough and well documented on the site and has formed the basis for developing Retail client sentiment data into a contrarian indicator for FXCM and DailyFX and must be well over 10 years old by now.

[dmedin]

Trading isn't very different from gambling or professional poker playing.  To the extent that gambling isn't a sustainable choice of profession for most people, trading isn't either.  Unless you're trading with someone else's capital, and getting paid a regular salary for it.  Or providing technical 'analysis' aka wishful thinking

 

[Caseynotes]

2 hours ago, dmedin said:

Trading isn't very different from gambling or professional poker playing.  To the extent that gambling isn't a sustainable choice of profession for most people, trading isn't either.  Unless you're trading with someone else's capital, and getting paid a regular salary for it.  Or providing technical 'analysis' aka wishful thinking

 

The reason you see this as being no different from gambling is because that is exactly how you look at it.

Listen to your own commentary; ooh it's up yeah, ooh it's down noooo, up, down, up, down. you may as well be on a race track 🏇🏇

At some point you will realise that that really is not the way.