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 countertrend, 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 is being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent are considered to be at an extreme level, while market sentiment readings over 80 to 95 percent are 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 – Overstretched
According to the ActivTrader Market Sentiment tool, a large majority of traders are still bearish towards the EURUSD, despite its rally towards the 1.0750 level.
The ActivTrader Market Sentiment tool shows that only 33 percent of traders are expecting more upside in the European currency This is a 2 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.
GBPUSD – Sell sentiment High
The ActivTrader market sentiment tool shows that only 18 percent of traders are bullish towards the GBPUSD as it continues to trade much higher.
The sentiment bias certainly alludes to more upside trading, however, it is important to state that bearish sentiment has dropped by around 20 percent since last week.
I think we also have to consider that the USD is currently taking a thrashing and this sentiment bias we could soon see a nasty unwinding as traders become too bearish.
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 33 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.