Experiment - Trading Market Sentiment

Hello,

I've started this thread to share ideas about trading market sentiment.

The theory behind it goes something like this: The ‘big money’ moves the markets. The ‘big money’ needs others to take the other side of it’s trades. The market will therefore do whatever it takes to dupe the majority of retail FX (amongst others) into taking the other side of the big money’s trades. You can read more about my theory here: http://www.myforexdot.org.uk/whyretailforexiswrong.html

I exited a long position based on sentiment at the end of last week after going long on the EUR/USD over a month ago, another poster on Forex Factory called 'Mr. D' also followed the trend up and made 600 pips. The trading thread is here http://www.forexfactory.com/showthread.php?t=257177 where you can follow our journals.

Anyway, according to OandA retail sentiment is definately long EUR/USD http://fxtrade.oanda.com/analysis/open-position-ratios

Trade is short EUR/USD @ 1.3809

Here is Dukascopy`s Sentiment Index.
http://www.dukascopy.com/swiss/engli...tch/sentiment/
Good luck.

Here is FXCM's DailyFX sentiment index of their retail account positions.

EURUSD - The ratio of long to short positions in the EURUSD stands at 1.13 as nearly 53% of traders are long. Yesterday, the ratio was at 1.18 as 54% of open positions were long. In detail, long positions are 14.0% higher than yesterday and 80.8% stronger since last week. Short positions are 19.6% higher than yesterday and 16.8% weaker since last week. Open interest is 16.6% stronger than yesterday and 117.2% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD losses.

GBPUSD - The ratio of long to short positions in the GBPUSD stands at 1.52 as nearly 60% of traders are long. Yesterday, the ratio was at 1.77 as 64% of open positions were long. In detail, long positions are 8.5% lower than yesterday and 58.9% stronger since last week. Short positions are 6.6% higher than yesterday and 26.0% weaker since last week. Open interest is 3.1% weaker than yesterday and 109.1% above its monthly average. The SSI is a contrarian indicator and signals more GBPUSD losses.

GBPJPY - The ratio of long to short positions in the GBPJPY stands at -3.19 as nearly 76% of traders are short. Yesterday, the ratio was at -1.67 as 63% of open positions were short. In detail, long positions are 4.9% lower than yesterday and 16.4% weaker since last week. Short positions are 81.2% higher than yesterday and 141.1% stronger since last week. Open interest is 49.0% stronger than yesterday and 181.3% above its monthly average. The SSI is a contrarian indicator and signals more GBPJPY gains.

USDJPY - The ratio of long to short positions in the USDJPY stands at 4.38 as nearly 81% of traders are long. Yesterday, the ratio was at 4.60 as 82% of open positions were long. In detail, long positions are 1.5% lower than yesterday and 8.9% weaker since last week. Short positions are 3.4% higher than yesterday and 15.0% stronger since last week. Open interest is 0.7% weaker than yesterday and 81.3% above its monthly average. The SSI is a contrarian indicator and signals more USDJPY losses.

USDCHF - The ratio of long to short positions in the USDCHF stands at 2.56 as nearly 72% of traders are long. Yesterday, the ratio was at 2.68 as 73% of open positions were long. In detail, long positions are 7.6% lower than yesterday and 28.2% weaker since last week. Short positions are 3.3% lower than yesterday and 14.8% stronger since last week. Open interest is 6.4% weaker than yesterday and 67.9% above its monthly average. The SSI is a contrarian indicator and signals more USDCHF losses.

USDCAD - The ratio of long to short positions in the USDCAD stands at 5.52 as nearly 85% of traders are long. Yesterday, the ratio was at 4.28 as 81% of open positions were long. In detail, long positions are 4.5% higher than yesterday and 8.7% stronger since last week. Short positions are 18.9% lower than yesterday and 6.4% weaker since last week. Open interest is 0.0% stronger than yesterday and 115.9% above its monthly average. The SSI is a contrarian indicator and signals more USDCAD losses.

AUDUSD - The ratio of long to short positions in the AUDUSD stands at -1.64 as nearly 62% of traders are short. Yesterday, the ratio was at -1.79 as 64% of open positions were short. In detail, long positions are 8.4% higher than yesterday and 50.0% stronger since last week. Short positions are 0.4% lower than yesterday and 18.4% weaker since last week. Open interest is 2.8% stronger than yesterday and 97.7% above its monthly average. The SSI is a contrarian indicator and signals more AUDUSD gains.

NZDUSD - The ratio of long to short positions in the NZDUSD stands at -1.44 as nearly 59% of traders are short. Yesterday, the ratio was at -1.55 as 61% of open positions were short. In detail, long positions are 4.2% higher than yesterday and 10.0% stronger since last week. Short positions are 2.9% lower than yesterday and 33.8% weaker since last week. Open interest is 0.1% weaker than yesterday and 53.4% above its monthly average. The SSI is a contrarian indicator and signals more NZDUSD gains.

FXCM's latest retail account sentiment.


EURUSD - The ratio of long to short positions in the EURUSD stands at 1.13 as nearly 53% of traders are long. Yesterday, the ratio was at 1.18 as 54% of open positions were long. In detail, long positions are 9.6% higher than yesterday and 73.8% stronger since last week. Short positions are 14.0% higher than yesterday and 20.6% weaker since last week. Open interest is 11.6% stronger than yesterday and 3.4% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD losses.

GBPUSD - The ratio of long to short positions in the GBPUSD stands at 1.23 as nearly 55% of traders are long. Yesterday, the ratio was at 1.77 as 64% of open positions were long. In detail, long positions are 17.2% lower than yesterday and 43.8% stronger since last week. Short positions are 18.5% higher than yesterday and 17.7% weaker since last week. Open interest is 4.3% weaker than yesterday and 9.4% above its monthly average. The SSI is a contrarian indicator and signals more GBPUSD losses.

GBPJPY - The ratio of long to short positions in the GBPJPY stands at -5.99 as nearly 86% of traders are short. Yesterday, the ratio was at -1.67 as 63% of open positions were short. In detail, long positions are 25.4% lower than yesterday and 34.5% weaker since last week. Short positions are 166.9% higher than yesterday and 255.1% stronger since last week. Open interest is 95.0% stronger than yesterday and 33.6% above its monthly average. The SSI is a contrarian indicator and signals more GBPJPY gains.

USDJPY - The ratio of long to short positions in the USDJPY stands at 2.83 as nearly 74% of traders are long. Yesterday, the ratio was at 4.60 as 82% of open positions were long. In detail, long positions are 10.7% lower than yesterday and 17.4% weaker since last week. Short positions are 45.1% higher than yesterday and 61.3% stronger since last week. Open interest is 0.8% weaker than yesterday and 10.7% below its monthly average. The SSI is a contrarian indicator and signals more USDJPY losses.

USDCHF - The ratio of long to short positions in the USDCHF stands at 2.19 as nearly 69% of traders are long. Yesterday, the ratio was at 2.68 as 73% of open positions were long. In detail, long positions are 10.8% lower than yesterday and 30.6% weaker since last week. Short positions are 9.3% higher than yesterday and 29.8% stronger since last week. Open interest is 5.3% weaker than yesterday and 12.9% below its monthly average. The SSI is a contrarian indicator and signals more USDCHF losses.

USDCAD - The ratio of long to short positions in the USDCAD stands at 6.13 as nearly 86% of traders are long. Yesterday, the ratio was at 4.28 as 81% of open positions were long. In detail, long positions are 10.6% higher than yesterday and 15.1% stronger since last week. Short positions are 22.7% lower than yesterday and 10.8% weaker since last week. Open interest is 4.3% stronger than yesterday and 17.2% above its monthly average. The SSI is a contrarian indicator and signals more USDCAD losses.

AUDUSD - The ratio of long to short positions in the AUDUSD stands at -1.58 as nearly 61% of traders are short. Yesterday, the ratio was at -1.79 as 64% of open positions were short. In detail, long positions are 9.4% higher than yesterday and 51.4% stronger since last week. Short positions are 3.4% lower than yesterday and 20.9% weaker since last week. Open interest is 1.2% stronger than yesterday and 2.9% above its monthly average. The SSI is a contrarian indicator and signals more AUDUSD gains.

NZDUSD - The ratio of long to short positions in the NZDUSD stands at -1.61 as nearly 62% of traders are short. Yesterday, the ratio was at -1.55 as 61% of open positions were short. In detail, long positions are 0.8% higher than yesterday and 6.4% stronger since last week. Short positions are 5.1% higher than yesterday and 28.3% weaker since last week. Open interest is 3.4% stronger than yesterday and 10.4% below its monthly average. The SSI is a contrarian indicator and signals more NZDUSD gains.

Thanks for that folks. I'll try and update this thread around 8pm UK time with how it's gone each day. If the market sentiment changes I'll reverse my position - hopefully the results of trading this way posted live will produce something useful for us all to learn something from. The trade has been way over 100 pips in profit today but now it's only about 25 pips in profit so today there isn't much to write about. I'm only planning on trading the EUR/USD using sentiment for now.

Aside from dukascopy sentiment, I sometimes also check eToro's sentiment herewhich is pretty cool since you have filters like 'last hour', 'sort by trend', 'higher risk' etc...

On my fxbook here, there is also a pretty detailed outlook that I also like to check out.

What I've been noticing, and is also obvious, is that sentiments vary with their sources.. Dukascopy will have a view, FF another, oanda another, etoro another, myfxbook and so on... Therefore I ask you? Do you think this is a strategy worth taking? My view, I don't think so.

I see you want to go against the majority of the retail traders sentiments but when I check the sentiments, specially the 'last hour' on eToro, they are as much wrong as they are right. Nonetheless people have long explained that 2 people taking different sides can both profit or take loss.

So due to all this I heavily think that sentiments and COT analyses are a bit overrated.

OandA's open positions ratio is now at about 50/50 on the EUR/USD. If it's over 50/50 tomorrow with more shorts than longs I'll close my short position and go long. That's a big if though...

Well you might very well be right, nevertheless I want to try it live with real money (albeit not very much money) on this thread for a while. To have a lasting log of the results and others thoughts as I go along if not for anything else. I took a mechanical EUR/USD trend following trade just over a month back live on these forums and having to explain what I did day by day with the input of others helped me learn, focus and helped me stick with it (at least for a while). I'd like a similar record of using sentiment.

I'm taking my reading off OandA with a little input from DailyFX plus. Why? Because they are both big operations with lots of retail FX traders and I believe they are therefore more likely to offer a representative sample of the retail Forex market as a whole. Thanks for the links.

FXCM retail accounts

EURUSD - The ratio of long to short positions in the EURUSD stands at 1.07 as nearly 52% of traders are long. Yesterday, the ratio was at 1.02 as 51% of open positions were long. In detail, long positions are 3.1% lower than yesterday and 19.9% stronger since last week. Short positions are 7.9% lower than yesterday and 21.0% weaker since last week. Open interest is 5.5% weaker than yesterday and 94.5% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD losses.

Well it's been quite a good day today with the market closing (closing being 8pm UK time) at around 1.3655 so that's the trade about 150 pips in profit so far But this is mostly just down to luck; it's impossible to pick exact tops and bottoms as markets are pretty much random over short time frames, so to get into profit quickly is mostly luck. Saying that, 150 pips isn't all that big a profit at all really and could easily be wiped out VERY quickly if the market were to turn against the trade. The ratio on OandA is around 53% long 47% short.

I usually trade mechanically and believe the best mechanical systems are long-term trend following systems which give you signals based on price, you can read more about that here: http://www.myforexdot.org.uk/best-fo...g-systems.html if anyone is interested.

But I will use sentiment to exit trades and occasionally to enter trades too. Sentiment is something I haven't tested nearly as much as price based trading though, but I'm hoping this tread will lead to me learning a lot more about it.

I believe that if you can get a large enough sample of the retail FX market, a sample that's large enough to be representative of the market as a whole, then it can tell you which side the big money is most likely on (i.e. usually against the little guys).

FXCM retails accounts. Thursday, 11 November 2010 17:06 GMT

EURUSD - The ratio of long to short positions in the EURUSD stands at 1.07 as nearly 52% of traders are long. Yesterday, the ratio was at 1.02 as 51% of open positions were long. In detail, long positions are 1.0% higher than yesterday and 25.0% stronger since last week. Short positions are 3.6% lower than yesterday and 17.3% weaker since last week. Open interest is 1.3% weaker than yesterday and 0.6% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD losses.

As long positions start building I will start to build a net short position.

FXCM Retail Accounts - Friday 12 November 2010 10:30 GMT

EURUSD - The ratio of long to short positions in the EURUSD stands at 1.03 as nearly 51% of traders are long. Yesterday, the ratio was at 1.10 as 52% of open positions were long. In detail, long positions are 3.0% lower than yesterday and 18.3% stronger since last week. Short positions are 3.2% higher than yesterday and 6.1% weaker since last week. Open interest is 0.0% weaker than yesterday and 107.2% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD losses.

Right, the market is at 1.3718 right now but OandA has 50.84% of traders short so I'm closing for a 91 pip profit, not a loss but hardly a great trade.

I suspect the market will go lower but I'm trying to follow OandA's open positions ratio so I follow until the sentiment changes. Won't go long quite yet as DailyFX+ don't quite say the samething. They had 49% of traders short this morning...

I want to stay short, but the system says I can't. Won't go long yet until it's clearer, I mean it's virtually 50/50.

Has anyone been trying this? If so, how are you getting on?

Good trade mate!
I will be looking to get into a position once we see a clearer percentage between longs and shorts, as you say, 49%/51% isn't too much to go by.

Yeah me too. Once I get another clear picture I'm entering in that direction.

For me the purpose of this thread is to learn more about trading using market sentiment. If I lose money doing it then so be it, but I have to find out for myself what works and what doesn't. For me that is what this forum is for really, us all sharing our experiences for mutual learning.

Can I ask you fosking, do you believe trading using market sentiment actually works? And, if so, why do you think that is? Do most retail traders just fade the long-term underlying trend because they're gamblers? Or do most big traders take the other side of their trades and let the market deceive them into it? Or is it something else entirely? What is it?

Perhaps there is a way to anticipate using correlation. Maybe have a look at EUR/GBP and GBP/USD ...


I am not the person intended to answer this question, but I think you'll let people jump in
As a fact, I'm sure it does work. Just look at forums here to understand that most traders are way too late on their trades. They buy tops and sell bottoms. I know what I'm talking about, I've been one. The timeframe they trade into has no importance, whether it is on daily or M5 charts, it's always the same story. They buy a top and only trigger the stops at the bottom, it's impressive. Of course, posts do not tell you that because most people only write about their successful trades, but there is enough people that honestly post their loosers so you can make your own idea of it.

Now, I think the real issue is to find enough good data to enlight the right path. I've seen a link to etoro data in this thread, but from what I read, it looks like only their 1000 best performing accounts are included in those stats. For MyFXBook, I think it's almost the same story : people willing this service to follow their account and share it publicly are probably (mostly) successful traders. For Dukascopy data, I don't think an average loosing folk will have an account there ...

Anyway, I'm happy this thread exists and I'll be following it actively since I'm convinced of the interest of a good contrarian indicator. Traders trying to do some TA will go counter trend and hold their positions just because they think "a correction is due" (found on FF). Others are trying to analyse fundamentals without any knowledge of it and without understanding that markets are manipulated. And all of those people are either posting pre-trade analysis that would scary Dracula himself or post-trade help messages like : "my trade is now at -650 pips and I'll get a margin call at -700, do you guys think I should continue to hold it ?". I've been a quite horrible trader until I understand what this simple "follow the price" thing means. I really know how those losers are thinking, I've been one of them. This is why going against most retail traders is definitely the way.

However I think this should stay an indicator to confirm a trend. The most successful trading systems are based on multiple indicators (whether it is trend lines, candlestick patterns, oscillators, rsi, gator, S/R, Murrey Maths or anything else) and are looking for correlation between several of their indicators. They never place a trade based on only one indicator. Moreover, this indicator is lagging. It takes several days to reverse and you could well be at the end of a serious move when you'll get a clear signal from it. See your own EURUSD story, you sold @ 1.38 while it was @1.4280 a few hours before. Since EURUSD is currently ranging, you could as well have sold a bottom. Understand me : I like this contrarian indicator thing and I'm even willing to automate it by coding an MT indicator so I can have it on my screen. But I don't consider this can be a trigger to jump in a trade.

I'm really interested in your experiment and will be happy to follow your story.

Good job and happy trading !

Following others sentiment is usually not recommended. One has to ask, what are the market professionals and analysts basing their sentiment on?

I find websites, broker run market websites specifically, are usually wrong in assessing future market movements. They are good at writing articles on what has already happened. Visit those sites this week, there are plenty of sentiment on yesterdays move, but an article or discussion is never raised before bears took control this week.

I find doing my own market sentiment helps me better than following some stranger's advise. I use Weekly, Monthly, Quarterly, and Yearly charts to come up with an long, medium, and short term sentiment. Its especially interesting to watch all those timeframes line up in the same direction.

Market sentiment is dynamic. It changes just as often as price reverses in a day. To many market, economic, technical views to say for sure what market sentiment is.

Want dynamic intraday sentiment? You only have to look at the Weekly chart.



This chart represents the Weekly timeframe, what I use for intraday sentiment.

- If you where LONG bias from 1.8150 to 1.3400 - You made money.
- BEARISH reversal off 1.34 changed sentiment from SHORT for 3 weeks.
- 1.2650 market BULLISH continuation; sentiment LONG again.

Sentiment marked a change to 'indecision' once price reached 1.4200. Price was likely to pull back. In what we experienced this week for EURUSD, price aggressively pulled marking new BEARISH sentiment. Sentiment is BEARISH until 1.3400 is reached. From there sentiment may continue to be BEARISH or change to BULLISH.

Looking for market sentiment is not hard. When I traded End of Day (EOD) Equities, I always looking and traded in the direction of the Yearly sentiment (Which was LONG, back during my equity days). The same application I used then, can be applied now.



Ever wonder how Long Term Investors and Governments see the market? Its easy! Look at a yearly chart and understand how to read price action.

The chart above shows two sentiments this year: BEARISH and BULLISH sentiment.

- If you were SHORT bias from Jan 2010 to June 2010, you made money.
- If you were LONG bias from July 2010 to current, you made money.

Looking at the chart, sentiment possible may change before the year ends. The HIGHLIGHTED bars are important because, those are Trend Reversal bars. Sentiment is changing toward a BEAR bias. Assuming it holds up (and it likely will), EURUSD will be heading into the new 2011 year with a BEARISH sentiment. If you're short next month, there is a possibility you can make money. This is how Long Term Investors invest, using nothing more than Yearly market sentiment.

I think you need to trade market sentiment as a longer term strategy to be fully effective.

My main profits from Forex come from longer term trades, which I could hold for weeks and possibly months at a time. The first thing any new trader needs to learn is to trade with the trend. It's said endlessly that the trend is your friend, but in the majority of cases, it is.

New traders are so eager to find the perfect entry or exit using technical analysis, they forget that ultimately it's fundamentals that drive the market and not their fancy shiny new indicator. New traders also forget that the majority of indicators they start covering up their screens with are lagging indicators (use past data to predict future moves) and in fact don't normally give a signal until the optimum entry/exit has passed. This is another reason so many traders buy tops and sell bottoms because their indicators are lagging.
In fact, the more indicators you have coving up your charts, the later you will find yourself getting into trades. All lagging indicators are using the same past price action. If you are using 4 indicators which have a 40%, 30%, 20% and 10% win rate respectively, what is your win rate probably going to be once all these for indicators line up together? The chances are the maximum and I mean if your really lucky, would be 40%. Why? The reason is the 40% win rate indicator can win a higher percentage of the time is because it can produce signals at a quicker rate than the other 3 indicators. In actual fact, your win rate using these 4 indicators will probably be a maximum of 10% as this is the last indicator to give you a signal and complete your reason to enter a trade. I know that was going a bit off topic but I believe it's a big mistake nearly every newbie trader makes and it's certainly one I did, but it tends to explain, whilst their reasoning seems logical to enter a trade, in practice a lot of the time you will be waiting for a signal which has been and gone on price action a long time before you get your signal and end up buying tops and selling bottoms.

Many new traders come into Forex wanting to day trade their way to millions. They start spreading their indicators over M5 charts and over leveraging and within a couple of weeks or months they've blown their account. I know I'm guilty of trading M5 charts whilst bored and it's certainly unpredictable and difficult to make consistent winning trades. When trading M5 I will only use trend lines, support and resistance, fibs and pivots and price action. There's no lagging involved and price either bounces of one of these and I'm right or goes through and I'm wrong. The most simplest and reliable trading strategy and it's still very difficult. Putting indicators across these charts for a newbie will almost defiantly blow their account as your entries/exits need to be spot on consistently.

Slow and steady wins the race in the long term for the majority of successful traders. Don't be afraid to trade longer term which will of course take longer, but it will also tend to be higher probability. This is where you can really see trader sentiment come into play as more and more traders start calling tops and bottoms, in a lot of cases the speed in which the trend is traveling will speed up against these traders and the big boys are loving the new liquidity that these small fish are giving them. I think you really need to start thinking like a big fish to be one. It's very important when trading longer term to keep an eye on fundamentals also. So many traders will see a retracement and exit and go the other way because they think it's a reversal. Use trend following indicators like Heiken Ashi to stay cool and stay in the trend.

So I think these are just a few reasons sentiment indexes can be effective contrarian indicators. As we know at least 95% of traders loose money, so I would rather be doing the exact opposite of what they are doing and hopefully thinking like a big fish instead of calling tops and bottoms like the small guys that consistently loose money. Only on rare occasions when fundamentals permit would I go with so many small fish, namely long on USD/JPY.

A quality post for sure. Thanks for you input.

In regards to most retail traders losing it's amazing how consistent most of them are isn't it. They seem to have this uncanny ability (as a group) to pick the tops and bottoms and do exactly the wrong thing. Even the best traders don't seem to be able to consistently win every single month - but some retail trades seem to be able to consistently lose every single month without fail.

Why do you think this is? What do you think the reason for this is?

FXCM Retail Accounts - Monday, 15 November 2010 10:30 GMT

EURUSD - The ratio of long to short positions in the EURUSD stands at 1.13 as nearly 53% of traders are long. Yesterday, the ratio was at 1.03 as 51% of open positions were long. In detail, long positions are 10.7% higher than yesterday and 4.3% stronger since last week. Short positions are 1.0% higher than yesterday and 6.3% weaker since last week. Open interest is 5.9% stronger than yesterday and 100.6% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD losses.