In this article I am going to be looking at the Market Sentiment tool on the ActivTrader platform in order to identify how traders are positioned in the foreign exchange market and gold and try to determine which trades are overcrowded trades or overwhelmingly one-sided.
Before we get to the top trades it is important to note the Market Sentiment tool is the best probably the best as a contraction indicator. For example, when traders are fighting against established trends the indicator offers a warning sign that the trend may be set to continue.
Another useful technique in incorporating the Market Sentiment tool into your trading is to look for record high or record low readings. For example, if 95 percent of traders are long a trading instrument this means that the trade is becoming way too overcrowded.
The same is also true in the opposite direction. If a disproportionate number of traders are short an instrument then it is considered overcrowded. Reading over 90 should be considered sentiment extremes.
Neutral reading provides us with an indication that range bound conditions are likely to persists in the near-term. The longer that sentiment remains neutral then there is more likelihood that the majority of trading action is probably taking place elsewhere.
US Dollar Index Market Sentiment
The Market Sentiment Indicator shows that 85% of traders are currently long the US dollar index. It is important to note that the US dollar index is in a bullish trend and has been moving lower at the start of the week.
Personally, I believe that the US dollar index could start to push higher this quarter. However, this current Market Sentiment reading suggests that traders who are long the US dollar index may be getting squeezed hard, as the US dollar index ticks lower, while the positioning skew remains extreme.
Should we see sentiment towards the index start to fall and price head higher it may be a classic case of traders exiting their positions at precisely the wrong time.
GBPUSD Market Sentiment
Market Sentiment towards the GBPUSD pair is slightly negative at the moment. This is interesting as the GBPUSD pair continues to rise after dips and is bullish over both the short and long-term.
The bearish skew in the GBPUSD pair is not sizable at this stage, however, it does suggest that the current move back above the 1.3700 level is likely to continue. The early week recovery certainly confirms this.
If the Market Sentiment reading remains at current levels, or worsens, then the GBPUSD pair could easily creep towards the 1.3800 handle.
GOLD Market Sentiment
Looking at the sentiment for Gold at the moment it suggests that traders are unsure about which way the yellow metal is going to trade in the short-term. This makes sense, as a bounce has taken place from the $1,800 level, however, the recovery has not been remarkable.
Typically, when sentiment is neutral it suggests range bound trading conditions are likely to persists, and the trade also a high degree of uncertainty attached to it. Even though a slight bullish skew exists, it is hard to draw bullish or bearish conclusions.
EURGBP Market Sentiment
The current sentiment skew towards the EURGBP pair is intriguing on many levels at the moment. Over 82 percent of traders are currently bullish towards the EURGBP pair, meaning that this trade is starting to look crowded.
Additionally, no major price trend is underway in the short-term, which means that traders are speculating on more upside, rather than looking to trade ride an ongoing price trend.
This overly bullish skew is worth watching. If this persists and the EURGBP pair starts to falter if may be a sign that major down move is going to take place. Should price continue to drop and the bullish skew in the EURGBP pair remains in place, watch out for the short-term trend to turn bearish and to accelerate to the downside.