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Market sentiment can be a key tool for traders and investors looking to identify overcrowded trades amongst a variety of instruments. One of the paramount features of this strategy is fading what the retail crowd are currently doing.
The ActivTrader platform Market Sentiment tool offers a key insight into how retail traders are currently positioned in real-time. This can be particularly useful for trend and swing-traders.
Typically, retail traders tend to lean against prevailing market trends and have poor market timing. Overcrowded sentiment from the retail crowd in one-direction, while an instrument is going in the opposite direction can be a sign that the trend could be set continue, this makes market sentiment an useful leading indicator for traders to follow.
Additionally, if a trade is going in the same direction as retail traders are predicting, and the trade is getting too crowded, then this may be a good time to look to fade what retail traders are currently doing.
In terms of market extremes, anything over 70 percent should start to raise some red flags for traders. This may not indicate that the trade is getting overcrowded, and it may be time to pay attention.
A market sentiment reading for an instrument that has reached over 80 percent is certainly at the extreme level, while market sentiment over 90 percent is often an indication that the trade could be peaking or reached a euphoric state, and could about to reverse at any time.
Regularly checking the Market Sentiment tool can certaintly aid your trading and investing goals, and can be used in conjunction with other indicators for identify overbought and oversold conditions such as the RSI and stochastic indicators.
USDCAD- Most overcrowded FX major
According to the ActivTrader Market Sentiment tool the USDCAD pair is currently the most overcrowded trade to the long side, with over 85 percent of retail traders current long this trade.
In this case in point retail traders have been, and are currently on the wrong side of the trade. The USDCAD pair has been on a 600 plus point losing streak since November, and shows few signs of reversing.
Source By ActivTrader.
When assessing how to trade this pair right now, the best way may be to play the USDCAD pair is to trade it to the short side while the retail crowd remains so heavily long this pair.
Alternatively, traders that want to buy the USDCAD, but are waiting for a sign that the tide may be turning could wait for the Market Sentiment to start to go back to normal levels.
Source By ActivTrader.
When the Market Sentiment tool returns to normal levels after being at extremes, it could mean that retail traders have been stopped out from their positons.
Traders looking for a major reversal signal in the USDCAD pair could also weight for the retail crowd to be overly short towards the USDCAD pair. Extreme negative sentiment towards the USDCAD pair could provide a powerful indication that a reversal is on the horizon.
GER30 – Approaching sentiment extreme
One of the keys to using Market Sentiment as a trading tool is spotting shifts in traders behaviour as they start to take place in real-time. Last week crowd behavior towards the GER30 started to shift after the index reversed from an all-time high.
Source By ActivTrader.
Traders are now increasing bearish bets towards the German DAX, despite the index hitting a new all-time last week. Sentiment is moving towards the 70 percent mark, which means that it is time to pay attention to what the crowd is doing.
Source By ActivTrader.
Traders looking to trade the GER30 to the long side should look for a clear divergence starting to form between price and the Market Sentiment tool. For example, should the GER30 start to rise again, and the negative sentiment increases, it could be an indication of a powerful new trend.
Remember, past performance has shown that retail traders typically lean against emerging or prevailing trend. Spotting divergences between price and market sentiment is vital when looking to fade crowd sentiment.
US DOLLAR INDEX – Time to worry
Market sentiment on the ActivTrader platform currently shows that over 81 percent of traders are short the US dollar index. This is particularly interesting given that the index is trading at its lowest level in over two years, and has been slipping dramatically over recent week.
Now may be the time to take a look at this trade, as 81 percent of retail traders are currently bearish towards the US dollar index. Meaning that a sentiment extreme is ongoing, and also the retail crowd are heavily involved.
Source By ActivTrader.
It is important to note that the retail crowd are not “always” wrong, however, crowd behaviour and and extreme sentiment is often a sign that a trend is reaching exhaustion, especially when the retail crows are so heavily involved.
Going forward, it would be prudent to see how this trade evolves. Watching sentiment towards the EURUSD pair can also compliment trading the US dollar index, due to its heavy weighting inside the index.
