The Positioning and Momentum report is just a look at how the market is treating each currency pair at the moment. And we like to look for outliers (extreme high or low scores), or changes compared to recent reports (the report is published once a week).
So for instance you might watch for extreme momentum readings on USD if you’re already bearish USD and looking for more reasons to go short. Or you might take some of our comments on positioning and come up with a trade idea that you can combine with other things you’ve noticed.
We also sometimes do studies of how extreme readings on the P & M have worked out in the past, and we include those in the report.
Obviously we never recommend trading off of one piece of data alone, which is why we generally don’t offer trading ideas off of just positioning and momentum. But we like to provide explanations along with the scores each week, so that we can tell a story so to speak of how positioning and momentum are changing. We find that this is one more useful piece of commentary for generating trade ideas.
Below is the full methodology.
APPENDIX: METHODOLOGY NOTES
The SFXPM Report is produced by Justin Ross and Brent Donnelly
All scores indexed to a -10 to +10 scale.
Positioning / Sentiment
CFTC LEVEL uses net non-commercial futures positions as percentage of open interest. Looking back across the sample from today back to January 1, 2000.
CFTC 4-Week Change shows the change in non-commercial futures positions as a percentage of open interest over the past four weeks. Is positioning getting shorter or longer over the past four weeks?
Daily Sentiment Index takes the most recent Daily Sentiment Index data and normalizes it to a -10 to +10 scale. The Daily Sentiment Index is a long-running and oft-cited survey of retail traders. I have been following DSI since the early 2010s, though it has been around since 1987! I find it particularly useful at the most extreme points. Three standard deviation extremes are a good place to take a shot at going the other way, especially if you have other reasons to do so. You can learn more about DSI and subscribe here: https://www.trade-futures.com/dailyindex.php.
For our Risk Reversal metric, we seek to intuit client and dealer options positioning via examining the price action in the volatility surface. We use the current 3-month risk reversal against a 1-month/6-month lookback, respectively, and score its current position on a scale of -10 to 10 for each currency in the grid.
The risk reversal provides a guide as to the outright interest on each side of the volatility smile; we note that barriers and leveraged bets tend to suppress the risk reversal, correctly suggesting that even though there might be many such interests in the market, with large notional payouts, they do not represent a delta-intensive position.
The 1-month score is noisier but provides some insight into the “direction of travel” in option flows. The 6-month score reflects more fundamental and structural positioning, as opposed to momentum or tactical trades.
Spectra FX Positioning is our best subjective estimate of positioning based on flows we’ve seen and conversations with clients.
1-month risk reversal and CFTC 4-week change get 25% weight compared to other variables in the index because they are short-term direction and mean revert quickly (in contrast to actual positioning, which is stickier).
Momentum
RSI is the 14-day RSI measure.
Deviation from 20-day is current spot level minus 20-day moving average.
Deviation from 100-day is current spot level minus 100-day moving average.
Note: All USD measures are the inverted average of all scores vs. each currency. For example, if every currency was +10, USD would be -10. If all currencies average +5, USD = -5.
Summary figures show the average (mean) of all line items for that currency.