Contrarian Indicators

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Contrarian Indicators

Some forex brokers also expose a data-driven indicator based on their client’s current positioning on each of the currency pairs. While some big fish in the forex market make their money because they have direct lines into commercial banks like Chase and Citi and into the central banks of other countries, most small traders don’t have access to such information. Therefore, the small fish who fail to analyze the market’s technicals and fundamentals successfully are usually wrong.

Believe it or not, some studies show that more than 70 percent of new small traders lose money. That’s probably because they fail to analyze the markets successfully, but instead trade as if they were gambling. They obviously aren’t equipped with the Invest Diva Diamond.

Some retail brokers reveal their clients’ positions. We can use this opportunity in our favor and go against the majority of the trading crowd.The SSI, or Speculative Sentiment Index, is one of these instruments. The positioning statement, which is the most popular element of the SSI, is a measure of the ratio of the number of traders on FXCM platforms holding long positions in a currency pair to the number of traders holding short positions in the same pair. We can use the SSI as a contrarian indicator and think of it as “fading the crowd,” or going in the opposite direction from the majority of retail traders.

The Speculative Sentiment Index can be a powerful tool, but just because it is one of the few leading indicators available to forex traders doesn’t mean that it’s perfectly predictive. You should still check in with the other points of your Invest Diva Diamond analysis.

One tip in using the SSI would be to first locate strong trends, then filter with the SSI indicator.