Forex institutional research

View the Text Version View Infographic Version Conclusion In this report, we examined the trading behavior of institutional investors in the hours and days leading up to, during, and after three events that had major impacts on foreign exchange markets.

Our results are informative along two dimensions: financial market stability and central bank communications. Our analysis shows that the institutional investor reactions to major market events, as reflected in trading volumes and risk transferred, varied in pace and size across sectors. Furthermore, these same four investor sectors did not transact against the prevailing move in exchange rates during the volatile repricing periods of these three events, contradicting the popularly held narrative that long-only investors with long-term investment horizons act as a stabilizing force during market dislocations.

Hedge funds and market makers played an especially significant role in the market ecosystem during these three events. Hedge funds transacted actively in FX markets just after each news event broke and during volatile conditions, participating in the establishment of a post-event market equilibrium. For all three events, market makers reconciled news about the fundamental value of the relevant currency with net flows, adjusted market liquidity, and established a post-event equilibrium exchange rate.

When deliberating policies that limit the trading activity of market makers or hedge funds, policymakers can use our results regarding the differential roles institutional investors played in establishing a post-event market equilibrium exchange rate to weigh this factor against any other relevant considerations. So how can the retail trader take advantage of this information? The data tracks the positioning of Non Commercial players banks and institutions as well as Commercial players Corporates and Private clients.

The report is long and complicated for new traders, though fortunately many websites now present the data taken from those reports in neat visual graphics updated each week. Understanding This Data Essentially, given what we know about the power of institutional order flow as discussed in the BIS report it makes sense that we would look to trade in the same direction as these major institutions and essentially piggyback their order flow.

The chart above shows the Non-Commercial positioning in GBPUSD going back to with the Yellow line representing price and the shaded blue region tracking positioning. When the blue shaded region positioning crosses above the center line, it represents a net-long position, and when it crosses below the center line it represents a net-short position.

The red circles highlight periods when positioning flipped from long to short and the green circles highlight period where the positioning flipped from short to long. Of the eight times positioning crossed over 6 resulted in the development of a significant trend. This is incredibly valuable information to have, and the opportunities it can afford should be clear.

Looking to trade in the same direction as Non-Commercial players can help individual traders catch major trends Another chart that clearly demonstrates the power of this data is the USDJPY chart showing the JPY positioning. Checking the data each week to see how the institutions were positioned the prior week can be a good guide as to which direction you should be looking to trade, however, the data can be quite choppy week on week and in terms of identifying a strong signal it is best to use COT in three instances Identifying a change in positioning As shown by the circles, when major institutions shift their bias e.

Identifying periods of extreme positioning The power of following a trend as denoted by positioning can be a fantastic asset to traders but of course, no trends last forever and so it is wise to be alert, though not neurotic, to potential reversal signals. One of the most reliable signals is when positioning moves into extreme levels which usually signals capitulation and exhaustion in the trend and highlights the likelihood of reversal.

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