Client sentiment analysis and trading

BY Chris Andreou

|December 3, 2021

What is client sentiment?

Client sentiment is the collection of position data of buyers and sellers for any given symbol.

This data is then aggregated and presented in a way that shows the percentage of client’s that are long and short on a broker’s trading platform.

Client sentiment is something that not enough traders pay attention to. It is a useful tool for analysis and it can give you an insight in to the collective opinion of market participants.

You can use client sentiment to help you determine your directional bias or to find trading opportunities.

The objective of this article is to inform you about this useful tool, so you can make better informed trading decisions.

However, it is important to know that the client sentiment data provided by any forex broker or trading platform is just a view of the client’s positions on that platform.

Since forex is decentralised, it’s not possible to get a complete or 100% accurate view of client sentiment across the whole market.

Client sentiment can only be approximated and the larger the sample size of date, the more accurate the view becomes.

So at best, it is a cross sectional view or a sample of what the market participants are doing.

Unlike the stock market that is centralised, and all transactions are done through an exchange.

Never the less, it is still one more tool you can use to get a better idea about what is happening in the market. When used in combination with other indicators, it can help you to make better informed trading decisions.

And that is basically what client sentiment shows you.

It shows you the sum of all decision making of the other participants in the market or on the brokers trading platform.

What causes client sentiment?

The cause of client sentiment generally comes from the different ways people analyse the markets.

Such as;

  • The technical analysis or trading method being used.
  • Or the economic, political and social trends that influence their decision making.
  • Even client sentiment itself can motivate people to buy or sell.

Here are some examples;

  • Two moving averages crossing on a chart might be the signal someone is looking for to buy or sell.
  • Someone else might buy a crypto currency just because they have read about it being the next big thing.
  • Someone else might be looking at client sentiment and buys or sells crypto just because most participants are doing that.

So client sentiment and the indicators that represent this are the effect of any cause that influences or motivates people to buy or sell. This buying and selling then affects asset prices.

What are sentiment indicators?

The sentiment indicators on TIO Markets website are represented as dials and they show us the open positions of TIO Markets clients for each asset or symbol.

You can also scroll down the page and select from other symbols if they are not shown here.

These sentiment indicators are being updated very frequently.

How to use client sentiment when trading?

Client sentiment indicators are very simple to use and they should be used as a contrarian indicators. Meaning, looking to the opposite of what the majority have done.

So if you see that the majority of market participants are long a currency pair, you should look for selling opportunities.

If you see that the majority of markets participants are short a currency pair, you should look for buying opportunities.

Because, most people lose money trading, it could be to your benefit to do the opposite of what most people are doing.

As a general guide, when sentiment is in the 40% to 60% range, the directional bias can still be considered neutral.

When sentiment is in the 60 to 85% range, the directional bias is clearer and you can expect price to move in the opposite direction of the majority.

When sentiment is over 85% long or short, then this can be considered extreme and the move might be close to exhaustion. It’s at these points when most traders will be stopped out or close their positions. So be cautious when sentiment is at the extremes.

Remember, these are not absolutes. Price moves in a wave like fashion and there will be times when prices move with the majority.

So it is important to use other indicators too, because client sentiment indicators do have limitations.

Limitations of client sentiment indicators

  • The first limitation is that it does not tell you where traders bought or sold
  • Or when they will close their trades.
  • It doesn’t tell you when the ratio between buyers and sellers is going to change.
  • These indicators don’t tell you when to buy or sell.
  • And, client sentiment is not a complete representation of the forex market.

The only thing this indicator does tell you, is the direction the other market participants are trading in on the broker’s trading platform.

So it’s only useful for helping you to determine a direction bias.

Examples of using client sentiment when trading

Let’s look at an example;

On the client sentiment indicators page on TIO Markets website, you can see the six major currency pairs.

The common denominator among all these pairs is the USD and you can see that the market is generally bearish USD. Meaning that most market participants are buying foreign currency and selling the US Dollar, at this time.

The client sentiment indicators are telling us that;

  • 86% of market participants are extremely long the EURUSD,
  • 90% of market participants are extremely short the USDJPY,
  • 87% of market participants are extremely long the GBPUSD,
  • 90% of market participants are extremely short the USDCAD,
  • 93% of market participants are extremely long the AUDUSD,

This suggests that it might be best to look for buying opportunities in the USD. But since the sentiment is at an extreme for most major currency pairs, the USD might be topping out.

The only currency pair here, where sentiment is not at an extreme is the USDCHF.

  • 57% of market participants are buying the USDCHF.

So there might be an opportunity to sell there but the signal doesn’t seem strong enough.

Let’s get on to the charts and take a closer look.

This is a chart of the US Dollar index, the symbol on the trading platform is DXA. This index tracks the strength or weakness of the US Dollar against foreign currency.

You can see that the US Dollar has been bullish since May, price has been making higher highs and higher lows and the index is currently at a relative high.

There isn’t enough information yet to suggest that the USD will reverse this trend. However, this recent move might be exhausted and this could be a temporary top.

Given these market conditions, it might be best to wait for a correction. Then re-evaluate the sentiment indicators to help support the idea of buying USD at better prices.

Let’s take a look at a chart of the USDCHF.

The price action seems quite mixed and there doesn’t seem to be a clear trend. The price kind of looks like it’s stuck in a range on the higher time frames.

However, price might be bouncing off a short term resistance area.

Client sentiment is still somewhat neutral though, so trying to short this currency pair might not be the best idea at the current time. But, for a short term trade, there might be some movement to the downside.

But remember, most market participants are bearish USD in general; they are selling it against all the other major currencies.

So generally speaking, conditions are not that great to execute trades in the majors at the current time. Given these market conditions, there doesn’t seem to be much motivation to trade.

In that case, the client sentiment indicators could be helping to protect and preserve capital.

Summary about client sentiment indicators

You should investigate these indicators further for yourself, practice with them and decide if they have a place in your trading strategy.

You are not alone if you find yourself on the wrong side of the market often. In fact most people that trade in the financial markets lose money. And most people just can’t break that cycle. What you should understand is that the market works in a certain way.

It takes from the majority and rewards the minority.

Things are set up to be like that and this will likely never change. But you can adapt to the ways of the market and use the predictability of the crowd to your advantage.

Many traders choose not to follow the masses but opt do the opposite of what most people are doing instead.

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Chris AndreouAuthor

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