Traders Are Buying Euro Dollar. Should I sell EUR/USD?
Yesterday, the U.S. Federal Reserve left the Fed Funds rate unchanged at 2 percent as widely expected by the market and retail traders have been taking new long positions. In fact, long positions are up by 13.2% since yesterday and the ratio of long to short positions in the EURUSD stands at 1.73 as nearly 63% of traders are long. Yet, in the past, the SSI has been working really well as a contrarian indicator, particularly during trending markets, and the EURUSD could sell off more in the next few days.
Why contrarian traders are normally more profitable?
Generally speaking, more long positions don't necessary suggest more confidence in the direction of the current trend. Indeed, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action. The current positioning for the world’s most heavily traded currency pairs is located in the table below.
What is the FXCM SSI?
SSI stands for Sentiment Speculative Index. The SSI is based on proprietary customer flow information. It is a real-time snapshot of the positioning of more than 30K retail traders given by the FXCM Execution desk. The absolute number of the ratio itself represents the amount by which long orders exceed short orders or vice versa. A negative number indicates that the majority of traders are net short while a positive number indicates that the majority of traders are net long. The FXCM SSI is published every week on DailyFX.com.
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