How to Use Pivot Points to Measure Market Sentiment.
There is one other way to incorporate pivot points into your forex trading strategy, and that’s to use it to gauge market sentiment .
What this means is that you can tell whether traders are more inclined to buy or sell the pair.
All you would need to do is to keep an eye on the pivot point. You could treat it like the 50-yard line of a football field.
If the price breaks through the pivot point to the top, it’s a sign that traders are bullish on the pair and you should start buying the pair like it’s a Krispy Kreme donut.
Here’s an example of what happened when the price stayed above the pivot point.
In this example, we see that EUR/USD gapped up and opened above the pivot point.
Now, if price breaks through the pivot point to the bottom, then you should start selling the pair like it’s Enron stock.
The price being below the pivot point would signal bearish sentiment and that sellers could have the upper hand for the trading session.
Let’s take a look at a chart of GBP/USD.
In the chart above, we see that the price tested the pivot point, which held as a resistance level. Next thing you know, the pair keeps going lower and lower.
Of course, it doesn’t always work out like this.
There are times when you think that forex traders are bearish on a pair, only to see that the pair reverses and breaks through to the top!
In this example, if you saw price breaking lower from the pivot point and sold, you would have had a sad, sad day. Later.
Later on, during the European session, EUR/USD popped higher, eventually breaking through the pivot point. What’s more, the pair stayed above the pivot point, showing how buyers were rockin’ away.
The lesson here?
Traders are fickle!
This is why you cannot simply buy when price is above the pivot point or sell when it is below it.
Instead, if you choose to use pivot point analysis in this way, you should combine it with other indicators to help you determine overall market sentiment.
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How to Read Risk ’OFF’ or Risk ’ON’ Sentiment.
Swing trading, chart patterns, breakouts, and Elliott wave.
The market sentiment seems to flip flop back and forth on a daily basis between a “Risk On” and a “Risk Off”. Reading Risk Sentiment is as simple as following the direction of the US Stock Market.
Each day, it seems a new rumor is produced and the stock markets shifts accordingly. The seesaw action can take a toll on a trader’s emotions.
One way to gauge an underlying trend in the market is through the risk appetite of investors. The benefit of understanding the mood of the market is it allows you to align your trades in the direction of the market sentiment.
When you see the stock market increase significantly, that is an indication that risk is “on”. A risk “on” environment is a mood of the market where investors feel good about the future prospects of the economy. Therefore, they take their capital and speculate in the stock market and high yielding instruments. This generally increases the value of the stock market and high yielding currencies which lately are the Australian Dollar s (AUD) and New Zealand Dollar s (NZD).
At the same time, low yielding instruments tend to gain less on a relative basis or possibly even lose value. Low yielding currencies tend to be sold to fund the purchase of a higher yielding currency. This selling of a low yielding currency while simultaneously buying a high yielding currency is called the Carry Trade. So an effect of a risk “on” sentiment is an increase in the stock market and demand for high yielding currencies. As a result the Carry Trade strategy tends to perform well. (See additional resources below for more information on the Carry Trade Strategy.)
(Created by J. Wagner)
In the chart above, since the AUD has historically been a high yielding currency, when the risk sentiment was ‘ON’ (Green shaded areas) the AUD/USD exchange rate was likely to rise and the carry trade strategy worked well . When the risk sentiment turned ‘OFF’ (pink shaded areas) the AUD/USD exchange rate tended to fall and the carry trade strategy would not have performed inconsistently.
W hen you see the sto ck market fall like we did earlier this week that is labeled as risk “off” in the media. That means investors and traders are averse to risk…they want to avoid risk and risky instruments. Therefore, the investors pull their money out of stock s by selling their shares and sell their risky instruments like high yielding currencies. In a risk “off” market mood, the carry trade does not work. Although a trader is gaining a daily dividend, the movement of the exchange rates is so adverse that is wipes out any interest gains.
In a risk “off” environment, traders are better served buying safe haven currencies like the US Dollar (USD) or Japanese Yen (JPY). (Until August 2011, the Swiss Franc was also considered a safe haven currency, but the recent intervention by the Swiss National Bank is trying to curtail the buying of the Franc.)
The risk assets like the US Stock market and high yielding currencies like the AUD are near resistance levels. This may mean a return to risk aversion and a selloff in the stock market and AUD/USD.
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education.
To contact Jeremy, jwagnerdailyfx . Follow me on Twitter at JWagnerFXTrader.
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How to Measure Retail Forex Market Sentiment?
Market sentiment shows the current disposition of traders relative to specific currency pairs. While futures exchange-based sentiment meters (Commitment of Traders report) can even show separate numbers for different types of traders, spot Forex traders are usually limited to retail trade sentiment meters provided by big brokers.
You would need to get info from several brokers to get a more precise picture of the situation with sentiment because brokers base their sentiment values on their client base, which is limited even at big companies. Below, you will find descriptions of some of the most popular online Forex sentiment meters.
Open Position Ratios show the long/short ratios for the positions in 14 currency pairs and two metals (silver and gold): AUD/JPY, AUD/USD, EUR/AUD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/USD, GBP/CHF, GBP/JPY, GBP/USD, NZD/USD, USD/CAD, USD/CHF, USD/JPY, XAG/USD and XAU/USD.
In addition to long/sort ratios, you can check the percentage share of each of the above-listed trading instruments in total number of positions.
Order Book shows the number and the price levels of open orders and positions for a given trading instrument. Information can be accessed for any of the past 24 hours. The order/position book view is offered in three types of views:
Non-cumulative — a normal view that shows how many long/short positions or buy/sell orders are located at a particular price level. Cumulative — the same as above, but orders and positions are summed at each price level up and down starting from the current price. This allows one to see how many orders/positions lie ahead on the way to some given price point. Net — same as non-cumulative , but short positions are subtracted from long ones, and sell orders are subtracted from buy ones on each of the price levels. This provides a net total of orders any of given price levels.
In any of the three views, the price scale can be zoomed in and out.
The information is updated every 20 minutes.
You can use Oanda‘s Historical Open Orders and Historical Position Ratios for in-depth research. The data charts are available in one month, one week and one day periods for orders and in one day, two day, one week, one month and one year for positions.
ForexFactory.
Positions / Live Accounts indicator shows a breakdown of long/short traders and lots for 10 currency pairs at a time. By default they are: EUR/CHF, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD, GBP/JPY, EUR/GBP and EUR/JPY. However, they can be changed to almost any other currency pairs. The numbers are presented in a very accessible manner.
Additionally, it is possible to view the details for an individual currency pair. They include Traders, Lots, Average Entry Price, Average Trade Duration, Winning Trades and Losing Trades. All values are broken down into longs, shorts and total. The details also show a chart for lots/traders in M5, H1 or D1 timeframe. There are about 40 hours of data available for M5, 30 days for H1 and a year for D1. The scale can be switched either to normal (percentage) or to relative mode.
A breakdown of community members and the sizes of their positions is visible below the details chart. This breakdown can also be switched to entry prices mode, showing the average entry rates of those positions. While many members protect their positions with privacy settings, some share their trades fully.
ForexFactory is not a broker but a community website for traders. Nevertheless they are able to offer their own sentiment meter. Its biggest problem is that it is based on the accounts of the traders who voluntarily signed up with ForexFactory and connected their live account to the website. This results in a limited and somewhat biased sample.
Speculative Sentiment Index is a sentiment metric based on number of traders who are long and short on a given Forex instruments. It is based on the data from the FXCM IG live account holders. The data is updated in real-time .
The data includes SSI for the current week, SSI for the last week, percentage of Long contracts, change in open interest and a trading signal generated by this info. The data is given for EUR/USD, USD/JPY, GBP/USD, AUD/USD, EUR/JPY, Gold, and S&P500.
A 6-month long daily chart can be invoked for any of those trading instruments. In addition to the main price curve, the chart features SSI ratio histogram and Retail Open Long/Short Positions lines.
Update 2017-11-15: DailyFX is a part of IG now. The description above has been updated to reflect that and also the changes in the SSI data displayed.
Provided by Saxo Bank, Forex Open Orders and Forex Open Positions charts offer order data similar to Oanda’s. The basic mode is free-for-all , which does not require any registration. However, more real-time and higher resolution data is available to the members of TradingFloor. Basically, it allows seeing position/ order ratio data at 15 minutes intervals. The charts are quite counter-intuitive . I had to press their “Show Help Using This Tool” button and read the pop-up windows with tutorial information to understand where long positions are and where are the short ones. The problem is that the button is only available on member-only charts.
The following data is provided for each of the 10 supported currency pairs (AUD/USD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/USD, GBP/JPY, GBP/USD, USD/CHF, USD/JPY and XAU/USD):
Aggregated Open Orders. Order sizes and buy/sell ratios. It is a single diagram for all currency pairs. Clicking on a currency pair name will bring up three other charts:
Normalized Net Orders — relative proportion of buy and sell orders at a given point in time. Instrument Open Orders — shows a number of buy and sell orders at given price points. Price Chart — a good old currency pair price chart.
Aggregated Position Ratios. Position sizes and long/short ratios. It is a single diagram for all currency pairs. Clicking on a currency pair name will bring up three other charts:
Normalized Net Positions — relative proportion of long and short positions at a given point in time. Instrument Open Positions — shows a number of long and short positions at given price points. Price Chart — currency pair price chart.
15-minute charts are available for a maximum horizon of 1 month, 1-hour data can be scaled out up to 6 months and there are 5 years of data for 1-day resolution.
SWFX is a short form of Swiss Forex Marketplace — an ECN network provided by Dukascopy. The main advantage of SWFX Sentiment Index is that it is divided into two parts — Liquidity Consumers and Liquidity Providers . The former are comprised of regular traders, money managers and hedge funds. Even if they use limit and stop orders, they are counted as liquidity consumers as they do not do it on a regular basis. Providers are banks and currency marketplaces who regularly set up bids and offers for other participants to trade on. Each trade in one category has a corresponding trade in another one.
Each category features both the current sentiment index and its historical version. The current index presents the percentage shares of buy and sell positions for a given currency pair or currency. The historical index shows long-short percentage share difference for each currency pair for the latest index update, for 6 hours ago, for 1 day ago and for 1 month ago.
The data is displayed for 6 currency pairs (EUR/USD, GBP/USD, USD/JPY, USD/CHF, EUR/JPY and GBP/JPY) and 6 currencies (USD, EUR, GBP, JPY, CHF and AUD).
The indicators are updated every 30 minutes.
OrderFlowFX.
OrderFlowFX presents a set of indicators for MetaTrader 4 platform to show sentiment analysis of the Forex market. The indicators use custom proprietary data, which is downloaded by a special external script (coded in Python) and provided by OrderFlowFX. Unlike other sentiment indicators presented here, this service is paid. They charge $69/month for using OrderFlowFX indicators. They also offer free 7-day trial to evaluate the product. There are 12 indicators in the package. Below, I present the most interesting ones in terms of the sentiment analysis. As of May 4, 2015, the company stopped providing its services to new customers. They also requested for their screenshots to be removed hence the blurred graphics on the images below.
Cumulative Position History offers a histogram of buyers and sellers at a particular bar of the chart:
Net Cumulative Position History features the same data but buyers and sellers are subtracted to produce a histogram where one bar is presented only by one color — either buyers or sellers:
Institutional Cycles measures the activity of buyers and sellers. It is a sort of momentum indicator for institutional sentiment. Large abrupt changes in the indicator signal a change in general sentiment towards the currency pair:
Long/Short Position Pressure indicators show the number of long/short positions in the market:
Open Position Volume Profile shows cumulative volume of all open positions at a given price level:
Open Positions shows the number of long/short positions by date:
Pending Stops shows the number of pending stop orders by price levels. It is an indispensable tool in finding the true support and resistance levels based on sentiment analysis:
The data is available for the following trading instruments: EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/CHF, USD/CAD, AUD/USD, EUR/GBP, EUR/AUD, EUR/JPY, NZD/USD, GBP/JPY, AUD/JPY, EUR/CAD, Crude Oil, Gold (XAU/USD), S&P500 and Silver (XAG/USD).
Both installation and usage process is not very straightforward. Such indicators are less convenient for one-glance use compared to the web-based tools provided by others. Also, the history of the available data is quite short (few months for some indicators). On the other hand, OrderFlowFX indicators offer a great opportunity for automation and expansion via developing other MQL4 indicators and expert advisors. This also allows backtesting of the strategies based on the sentiment analysis.
Update 2015-05-08: After being acquired by another company, OrderFlowFX has stopped providing its service to new clients on May 4, 2015.
My Choice and Poll.
I personally, prefer Oanda’s Open Position Ratios to track situation with the EUR/CHF sentiment. I am currently looking to increase my long position, but I am hesitant to do so while the vast majority of the retail traders are on the long side of the trade. And how do you use sentiment indicators?
If you would like to share your own methods of gauging the current sentiment of the currency traders or discuss any of the tools mentioned above, please feel free to do it using the form below.
Related Posts:
7 Responses to “How to Measure Retail Forex Market Sentiment?”
Dhruv Patel.
Thanks Alot for sharing themost valuable information in the FX market. whoever created this page is really santa claus for me. Mary christmas .
December 25th, 2014 at 10:00 am.
You are welcome.
really really helpful info, great job !
I use the myfxbook community outlook site. This has a very wide range of pairs and a good cross-section of traders.
I hope this is helpful to you and your readers.
February 27th, 2016 at 12:14 pm.
Thanks! Though the gauge is likely skewed due to the fact that it measures mostly the automated trading systems.
I’m looking for a way to add an SSI indicator into my algorithm to be used in any broker?
November 15th, 2017 at 6:05 am.
You could just build a simple webpage parser that would pull out all the SSI data you need from DailyFX and then apply it in your EA. That is doable in MetaTrader for example.
Forex Market Sentiment Indicators.
According to the April, 2012 Foreign Exchange Committee's Semi-Annual Foreign Exchange Volume Survey , there are on average almost $4.3 billion of forex spot transactions on a daily basis. With so many participants - most of whom are trading for speculative reasons - gaining an edge in the forex market is crucial. Fundamental analysis provides a broad view of a currency pair's movements and technical analysis defines trends and helps to isolate turning points. Sentiment indicators are another tool that can alert traders to extreme conditions and likely price reversals, and can be used in conjunction with technical and fundamental analysis.
When the percentage of trades or traders in one position reaches an extreme level, sentiment indicators become very useful. Assume our aforementioned currency pair continues to rise, and eventually 90 of the 100 traders are long (10 are short); there are very few traders left to keep pushing the trend up. Sentiment indicates it is time to begin watching for a price reversal. When the price moves lower and shows a signal it has topped, the sentiment trader enters short, assuming that those who are long will need to sell in order to avoid further losses as the price falls.
Sentiment indicators are not exact buy or sell signals. Wait for the price to confirm the reversal before acting on sentiment signals. Currencies can stay at extreme levels for long periods of time, and a reversal may not materialize immediately.
"Extreme levels" will vary from pair to pair. If the price of a currency pair has historically reversed when buying reaches 75%, when the number of longs reaches that level again, it is likely the pair is at an extreme, and you should watch for signs of a price reversal. If another pair has historically reversed when about 85% of traders are short, then you will watch for a reversal at or before this percentage level.
Sentiment indicators come in different forms and from different sources. One is not necessarily better than another, and they can be used in conjunction with one another or specific strategies can be tailored to the information you find easiest to interpret.
Commitment of Traders Reports.
Interpreting the actual publications released by the Commodity Futures Trading Commission can be confusing, and somewhat of an art. Therefore, charting the data and interpreting the levels shown is an easier way to gauge sentiment via the COT reports.
Barchart provides an easy way to chart COT data along with a particular futures price chart. The chart below shows the Daily Continuous Euro FX (December, 2012) futures contract with a Commitment of Traders Line Chart indicator added. The COT data is not displayed as a percentage of the number of traders short or long, but rather as the number of contracts that are short/long.
Large speculators (green line) trade for profit and are trend followers. Commercials (red line) use futures markets to hedge, and, therefore, are counter-trend traders. Focus on large speculators; while these traders have deep pockets they can't withstand staying in losing trades for long. When too many speculators are on the same side of the market, there is a high probability of a reversal.
Over the time period shown, when large speculators were short about 200,000 contracts, at least a short-term rally soon followed. This is not a definitive or "time-less" extreme level and may change over time.
Another way to use the COT data is to look for cross-overs. When large speculators move from a net short position to a net long position (or vice versa), it confirms the current trend and indicates there is still more room to move.
While the cross-over method is prone to provide some false signals, between 2010 and 2012 several large moves were captured using the method. When speculators move from net short to net long, look for the price of the euro futures, and by extension the EUR/USD, to appreciate. When speculators move from net long to net short, look for the price of the futures and related currency pairs to depreciate.
The forex market is "over-the-counter" with independent brokers and traders all over the world creating a non-centralized market place. While some brokers publish the volume produced by their client orders, it does not compare to the volume or open interest data available from a centralized exchange, such as a futures exchange.
Statistics are available for all futures contracts traded, and open interest can help gauge sentiment. Open interest, simply defined, is the number of contracts that have not been settled and remain as open positions.
If the AUD/USD currency pair is trending higher, looking to open interest in Australian dollars futures provides additional insight into the pair. Increasing open interest as the price moves up indicates the trend is likely to continue. Leveling off or declining open interest signals the uptrend could be nearing an end.
The following table shows how open interest is typically interpreted for a futures contract.
The data then must be applied to the forex market. For example, strength in euro futures (US dollar weakness) will likely keep pushing the EUR/USD higher. Weakness in Japanese yen futures (US dollar strength) will likely push the USD/JPY higher.
Futures volume and open interest information is available from CME Group and is also available through trading platforms such as TD Ameritrade's Thinkorswim .
Position Summaries by Broker.
The data is only gathered from clients of that broker, and therefore provides a microcosmic view of market sentiment. The sentiment reading published by one broker may or may not be similar to the numbers published by other brokers. Small brokers with few clients are less likely to accurately represent the sentiment of the whole market (composed of all brokers and traders), while larger brokers with more clients compose a larger piece of the whole market, and therefore are likely to give a better indication of overall sentiment.
Many brokers provide a sentiment tool on their website free of charge. Check multiple brokers to see if sentiment readings are similar. When multiple brokers show extreme readings, it is highly likely a reversal is near. If the sentiment figures vary significantly between brokers, then this type of indicator shouldn't be used until the figures align.
The Swiss bank Dukascopy provides multiple sentiment tools, one of which is pictured below, based on their client orders.
Certain online sources have also developed their own sentiment indicators. DailyFx for example, publishes a free weekly Speculative Sentiment Index (SSI), combined with analysis and ideas on how to trade the data.
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