What Is a Consensus Estimate?

Consensus indicators, also called "opposite opinion indicators", are psychological indicators, they do not belong to homeopathic indicators or swing indicators. In principle, consensus indicators can provide signals that trends are about to reverse. Once you get this kind of signal, you should look for more precise trading opportunities through other technical indicators.

Consensus indicator

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Consensus indicators, also called "opposite opinion indicators", are psychological

The average trader rarely publishes their views on the market, but financial commentators and communication advisers must constantly express their opinions. The few experts are quite knowledgeable, but their trading records overall are not ideal.

These experts often stay too long in major trends and often miss major turning points. When they are generally bullish or see-through, traders should take the opposite action, and the behavior of groups is more primitive than that of individuals. Consensus indicators are also called "opposite opinion indicators", they do not belong to homeopathic indicators or swing indicators.

In principle, consensus indicators can provide signals that trends are about to reverse. Once you get this kind of signal, you should look for more precise trading timing through other technical indicators.

As long as market groups generally have different opinions, trends can continue to develop. If there is strong consensus among the groups, the trends they have identified are about to reverse. If the group generally and strongly believes that prices will continue to rise, you should be ready to sell. Conversely, if the group generally and strongly believes that prices will continue to fall, you should be prepared to buy.

Opposition theory was originally proposed by Charles Mackay, an English lawyer. In the book "Extra ordinary Popular Delusions and the Madness of Crowds", he cited this view to illustrate the Dutch "Tulip Mania" and the English "South Sea Bubble" Group behavior. Humphrey B Neill cited the opposite opinion theory to the stock market and other financial markets. In his book The Art of Contrary Thinking, he explained why the majority opinion of major market turning points is always wrong. The price is set by the group. When the vast majority of people are long, there will no longer be enough buying to support the long market (translation: because everyone has bought).

Abraham W. Cohen is a practicing lawyer in New York. He uses a questionnaire to collect the views of professional analysts and represent the views of the group with their views. Ge Han is a skeptic. He has immersed himself on Wall Street for many years and found that the overall performance of investment consultants may not be better than the general group. In 1963, he set up a company called "Investor Intelligence Center" to track the opinions of investment communication consultants. When they were generally bearish on the market, Ge Han considered it a buying opportunity. Conversely, when these investment correspondents are generally bullish, it is an opportunity to sell. Cyber applied this theory to the futures market. In 1964, he set up a consulting company, "Market Wind Banner", to investigate the opinions of financial trading consultants, and used the number of subscribers to investment newsletters as a weight.

Some communications consultants are very savvy, but the overall performance may not be better than the average trader. At the main head of the market, their views are extremely overly high; at the main bottom, their views are extremely overly empty. This consensus is similar to the consensus of the trading community.

Most communication consultants follow the trend, and they seem stupid or lose subscribers because they worry about losing their main market. The longer the trend continues, the greater the communication consultant's shouting. The opinions of these trading consultants are most biased at the head of the market and most biased at the bottom of the market. When most communication consultants have a strong overweight or underweight view, it is best to take the opposite action.

Currently, there are several evaluation agencies that track the percentage of long / short views of transaction advisors. The two main agencies are the "Investor Intelligence Center" of the stock market and the "Market Wind Flag" of the futures market. Some trading consultants are very good at expressing ambiguous views, and they can claim that their views are correct regardless of the subsequent market trend. The editors of the Investor Intelligence Center and the Market Wind Banner have sufficient experience to deal with these chameleons. As long as the editor responsible for evaluation has not changed, the content of the report is inherently consistent.

Abc Cohen established the Investor Intelligence Center in 1963. He died in 1983 and was edited and distributed by Mike Burke. The Investor Intelligence Center tracks approximately 130 stock market communications consultants and divides their views into long, short, and parapetists. The percentage of short positions is especially important because stock advisers have difficulty emotionally maintaining a short position.

When the percentage of short opinions of these communications consultants rose by more than 55%, the market was nearing a major bottom. When the percentage of short positions is below 15% and the percentage of long positions rises more than 65%, it means that the market is close to the main head.

The Market Wind Banner evaluated 70 communications consultants covering 32 markets. It assesses how much each advisor sees each market based on 9 levels. The estimated readings are then weighted based on the number of newsletter subscribers (most communication consultants will seriously overstate the number of subscribers) to form the final consensus report. The consensus report indicator reads between 0 (most short) and 100 (most long). When the long consensus indicator reaches 70% to 80%, you should pay attention to the downward reversal; when the indicator reading is 20% to 30%, you should look for buying opportunities.

Taking the opposite action on the extreme readings of the long consensus indicator has its special reason in the futures market. At any given moment, the number of contracts to go long and short must be equal. For example, if the open interest in gold is 12,000 contracts, this means that 12,000 contracts are long, but there are also 12,000 contracts short.

Although the number of contracts in the long / short positions is necessarily equal, the number of people holding these contracts is constantly changing. If the overwhelming majority of people are bullish, the number of shorts will be small and their short positions will be relatively large. If the vast majority of people are short, there are very few people who are long, and each long has more contracts than shorts. In the following example, we assume that 100 traders hold 12,000 contracts for a certain commodity. , Then observe the impact of the long consensus change. ___________________________________

Open interest | Long consensus | Number of longs | Number of shorts | Number of contracts held per long position | Number of contracts held per short position

12,000 50 500 500 24 24

12,000 80 800 200 15 60

12,000 20 200 800 60 15

¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

1. If the reading of the long consensus indicator is 50, the number of longs and shorts will each be half, and the number of contracts held by each of the long and short parties will be the same.

2. If the long consensus indicator reads 80, 80% of the traders will be long and 20% will be short. Since the total number of contracts in the long / short positions is necessarily equal, the number of contracts held by each short is 4 times that of the longs, in other words, the funds invested by each short is 4 times that of the longs. "Big money" is the short side of the market.

3. If the long consensus indicator reads 20, 20% of the traders will be long and 80% will be short. Since the total number of contract positions in long / short positions is necessarily equal, the number of contract positions held by each long position is four times that of short positions. In other words, each long invested four times as much money as a short. "Big money" is multi-party in the market.

There is absolutely a reason why the "big money" becomes larger. Large traders are usually more savvy and successful than ordinary traders-otherwise they will no longer be large traders. When the big money is gradually concentrated on one side of the market, you better go in that direction.

In any particular market, the interpretation of the long consensus indicator must obtain at least 12 months of historical data to evaluate the indicator readings of the market turning point in the past (refer to Figure 39-1). These two readings (head and bottom) should be re-evaluated every three months. Then, whenever the indicator reading enters an extremely high area, look for opportunities for shorting through technical indicators. Conversely, whenever the indicator reading enters the extremely empty area, look for buying opportunities.

If more than three of the same "buying opportunities" are published on the same page of a major financial newspaper, they usually represent a warning sign on the head (see Figure 39-2). For most securities brokers, only when the upward trend develops for a long period of time is it enough to break their inertia in operations. When they both acknowledge a certain trend, make a proposal for a deal, and then spend time thinking about advertising in newspapers, the trend is probably too old.

Figure 39-2 Ad suggestions are reverse indicators

When several stockbrokers advertise in the same newspapers for the same goods, the existing trend is about to reverse. In the same section of the newspaper, if there are three or more buy advice ads for the same product, this is a short warning sign.

The ads on the Wall Street Journal's merchandise edition basically cater to the appetite of ignorant traders. These ads almost never include shorting suggestions; amateurs are usually not interested in shorting. Therefore, if three or more buying suggestions appear on the same market on the same day, you should look for shorting opportunities through technical indicators.

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