COT reports and open position data

One of the best ways to trade against the crowd is to look at the data itself. The Commitment of Traders (COT) report is provided weekly by the CFTC (the US Commodity Futures Trading Commission) and divulges how many contracts were bought and sold of a specific contract by commercial, non-commercial and private investors. When there are way more non-commercial traders holding trades than the historical average, it’s a clear-cut sign that the crowd is positioned on just one side. And this can indicate excellent reversal opportunities. Open position data from many forex broker’s are also a good source for seeing how traders are positioned in the currency markets.

Magazine covers & sentiment surveys

Sentiment surveys, the kind provided by Barrons and Investors Intelligence, are simple enough to evaluate. They provide reliable survey data of whether traders are bullish or bearish on certain markets which can be used to evaluate the crowd. Simply, if the majority of traders are bullish, say over 70%, then it could be time to go against the herd. Similarly, magazine covers have also been used as a contrarian indicator.

When a news story makes the front pages of a major magazine or newspaper, it signals that something big has happened, and this is usually a time to go against the crowd, since by the time the media pick up on a story much of the move will have taken place and all the information will be in the public realm.

For example, if TIME magazine decide to run a ‘shock’ story on the cover about the demise of the Japanese; it’s usually a signal to go long JPY.

Scan a chart

It is possible of course, to go against the crowd just by looking at a chart. Economic cycles typically take a while to play out but markets can over-react when too many traders move to one side of the trade. Sometimes the chart will show a situation where the price is becoming parabolic; in other words it is heading down, or up, in a near vertical fashion. Clearly, such moves are unsustainable and these are some of the best opportunities to go against the crowd in the forex markets.

Here lie the reasons for investors’ common emotional state, which makes for opening trades in the same direction. And what can you do when you do not have many skills but still have a desire to leave the unpleasant community straight away? Start with two specific rules.

Don’t make trading decisions at critical moments

The moments of abnormally high volatility are the most interesting situations in the market. This is when the asset determines the trend direction. Traders lose money due to the tottering movements. Most often, bursts of activity occur at the moment of news releases. It may be either economic calendar updates or the news that comes in unexpectedly. For example, the U.S. president spontaneously imposed sanctions on a country. This will result in a weakening of the currency of the state, which has got under pressure. A breakout through an important level also leads to increased volatility. Such benchmarks play a strategic role in the market.

Stock indices are most active during the first 5-10 minutes since the beginning of the trading session and during the same period before it closes. This pattern resulted from the specifics of trading these instruments. To keep calm and not to succumb to provocations of price spikes, avoid trading at critical moments. This does not imply that you should forget about trading.

Trade when the market is balanced

The price chart provides lots of useful information, but you can get even more of it when using such oscillators as RSI, Stochastic, and DeMarker. Each of them is divided into three zones: overbought, oversold, and the zone between them. Many traders focus on oscillators only when the signal lines are in the overbought or oversold zones. Indeed, the indicators often give the right signals. The only thing is that too many traders use this scheme.

Of course, such a method helps to earn money, but sometimes we receive just too many false signals. That is why it’s worth using these indicators to find the zone of the market balance to leave the crowd.

The RSI, Stochastic, and DeMarker will help you find the balance between the overbought and the oversold areas. Try to make trades at moments when other traders are not so active. Nothing huge, but few people see their independence in such things. Remember that trading in the new environment is a very useful experience. Put this advice into practice — and you will leave the market crowd.