Trader Sentiment – Trading Strategies

Trader sentiment is a useful graphical indicator tool that shows how retail traders are positioned on various underlyings (from forex to equity indices or precious metals such as GOLD and SILVER).

Usually the sentiment of traders is published by brokers who analyze the net positions of their clients but also by other websites such as myfxbook or mql5. The aim is to study how retail traders are positioned.

Based on this information we will evaluate some trading strategies.

Comparison of Market Sentiment Indicator Data

The first step is to compare the market sentiment between the various brokers or data providers. In this case, let’s take the positioning on the GOLD for example.

XM sentiment on GOLD (ticker XAUUSD)

On XM Broker you can analyze 2 important information:

1. trader sentiment is short for 73% and long for 27% of placements
2. the Technical Summary, on the other hand, highlights an “upward with correction” trend

From these data we can deduce that traders have rushed to sell gold, on the recent highs, but without a real technical bearish approach (which in fact remains long).

MyfxBook Sentiment outlook

The well-known site MyfxBook also shows us its trader sentiment. In this case the data is calculated based on the clients who register their trading accounts on the statistics site. Then the data of different traders and different brokers are considered.

In this case we notice a similarity of percentages on positioning. The data is also supported by the number of Volume and Positions.

FxBlue Sentiment

Another metatrader statistics site is FxBlue. In this case we notice a totally different percentage result.

Sentiment indicator of other brokers

The second step is to analyze the Sentiment indicator of other brokers such as:

Avatrade
IG
Tickmill
Pepperstone

Trading strategies with the Sentiment indicator

After analyzing all the steps we are going to understand how to implement a trading strategy.

Contrarian trading strategy

When should you “bet” against the sentiment indicator of retail traders?

It is known that retail traders tend to move contrarian with excessive speed and without particular confirmation. So if the market is high and retail sentiment is short then we should consider staying LONG.

Trend trading strategies with Sentiment

When to go in favor of the sentiment indicator?

It is advisable to evaluate the trend in sentiment of retail traders when the market has continued to move against retail for a few days. In this case, traders who are at a loss tend to increase their short positions (on an uptrend and vice versa) creating an increase in short sentiment.

If we can see a divergence of positions for a few consecutive days then we could enter short.

In practice, we expect retailers to go at a loss to have a greater chance that our positioning will go into profit.