Sentiment towards a number of currency pairs is changing, following the December FED rate decision. Now is a great time to check out some of the most extreme sentiment traders who look for contrarian trading signals via sentiment readings.
Trading sentiment is most effective when retail traders are running counter trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd are being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent is often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at the strongest sentiment bias amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends in FX, stocks, and precious metals are breaking point and big moves may be nearing.
EURUSD – Very Bearish
According to the ActivTrader Market Sentiment tool a large majority of traders are still bearish towards the EURUSD, despite its rally towards the 1.0700 level.
The ActivTrader Market Sentiment tool shows that only 37 percent of traders are expecting more upside in the European currency. This is a 20 percent increase since the previous trading week.
It should be noted that sentiment is very crucial for the EURUSD pair as we typically look to fade extreme sentiment biases in the stock trading industry.
USDCHF – Sentiment High
The ActivTrader market sentiment tool shows that only 26 percent of traders are bullish towards the USDCHF as it continues to crash lower.
The sentiment bias certainly alludes to more upside trading, however, it is important to state that bearish sentiment has dropped by around 6 percent since last week.
I think we also have to consider that the USDCHF pair is a mirror of the EURUSD pair, so watching the EURUSD pairs next move could be key.
NZDUSD – Very Bearish
Market sentiment towards the NZDUSD is getting very bearish, which is a good sign for bulls as one-sided sentiment skews tends to mean the opposite in terms of what traders are expecting.
The ActivTrader market sentiment tool showing that only 30 percent of traders currently bullish towards the NZDUSD currency pair right now.
I think it is worth noting that the only when traders start to turn bullish then the downside should start to pick-up.