Advanced Positioning, Flow, and Sentiment Analysis in Commodity Markets, 2nd Edition

CHAPTER 5‘Dry Powder (DP)’ Analysis – An Alternative Way to Visualise Positioning

Chapter objectives

• 5.1 Dry Powder (DP) Analysis
• 5.2 DP Indicator Variations
• 5.3 DP Indicators and Trading Signals

This chapter introduces Dry Powder (DP) analysis as a way of visualising positioning in commodity markets using a variety of different DP indicators. The indicators reconcile the historical long and short open interest in a specific trader category, with the number of traders holding the position.

DP indicators are plotted as charts which can be directly used as trading indicators to help assess the likelihood of an existing position becoming bigger or whether it is vulnerable to liquidation.

DP indicators can be modified in a variety of ways to isolate specific positioning dynamics. They also work well with other indicators and models to refine trading signals and enhance risk management.

Dry Powder

The term ‘dry powder’ refers to the gunpowder used in guns and artillery.

The allusion is to gunpowder which soldiers had to keep dry in order to be ready to fight when required. This advice reputedly originated with Oliver Cromwell during his campaign in Ireland. In Ballads of Ireland, 1856, Edward Hayes wrote:

‘There is a well-authenticated anecdote of Cromwell. On a certain occasion, when his troops were about crossing a river to attack the enemy, he concluded an address, couched in the usual fanatic terms in use among them, with these words – “put your trust in God; but mind to ...