More evidence of wrong-way retail


At the request of my PhD supervisor, I’ve been working on a document that will no doubt be part of my overall dissertation. It’s meant to explain retail spot forex in an academic manner (meaning multisyllabic words and copious formulas), with an eye toward setting the stage for my research into individual trader performance from a Behavioral Finance perspective.

In developing the area of the document which discusses market participants I came across a telling graph. Below is a 1-year look-back at the positioning of OANDA customers in EUR/USD, which I pulled from the broker’s website.

The black line is the EUR/USD exchange rate, while the histogram shows the overall net position of all OANDA customers (blue being net long, yellow net short). In many ways this is comparable to the Commitment of Traders (COT) report, which I’ve written about in this blog on several previous occasions (see Commitment of Traders – A Weekly Report Worth Viewing as a starting point).

What I want you to make particular notice of is how often in the chart above the market is rising when traders are positioned short and falling when they are long. This supports the often-expressed view that retail traders are usually on the wrong side of the market, and suggests in general terms that they trade in a counter-trend fashion.


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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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2 Comments:

  1. Savage1701 says:

    Not to be rude, but was there ever any doubt retail traders were almost always on the wrong side of the trade?

    I think Fred Schwed, Jr., pretty much covered this with the title of his book, “Where Are the Customer’s Yachts?”

    • John Forman says:

      Nope, not really much doubt, though It never hurts to post a reminder now and again, though, especially one so stark as EUR/USD above. That said, though, it’s interesting that while they tend to be the wrong side of trends, the info I’ve suggests they may win more often than they lose.

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