Forex Traders Are Long Sterling But the U.S. Dollar Could Rise Further

Retail traders have been aggressively buying GBPUSD (long positions are up by 18.9%). Yet, when retail is long and buying more, the GBP/USD normally sells off in the following days. In fact, more long positions don’t necessary suggest more confidence in the direction of the current trend since many of those traders who just entered the markets are also leaving their protective stop losses just below the current price action.

[B]GBPUSD – [/B]The ratio of long to short positions in the GBPUSD stands at 1.31 as nearly 57% of traders are long. Moreover, since last week, retail has been aggressively buying GBPUSD (long positions are up by 18.9%). In the past, when retail was long and buying more, the GBPUSD has sold off in the following days. In fact, more long positions don’t necessary suggest more confidence in the direction of the current trend. In general, 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 long orders in a bear market the more dangerous is to take additional long positions because many of those traders who just entered the markets are also leaving their protective stop losses just below the current price action.

[B]EURUSD –[/B] The ratio of long to short positions in the EURUSD stands at 1.07 as nearly 52% of traders are long. Yesterday, the ratio was at 1.15 as 54% of open positions were long. When retail is long but reduces its exposure, the long term direction remains bearish but the market might have some upside in the short term.

[B]USDJPY –[/B] The ratio of long to short positions in the USDJPY stands at 1.08 as nearly 52% of traders are long. Yesterday, the ratio was at -1.12 as 53% of open positions were short. Open interest is 2.7% stronger than yesterday and 5.2% below its monthly average. The SSI is a contrarian indicator and signals more USDJPY losses.

[B]USDCHF –[/B]The ratio of long to short positions in the USDCHF stands at -1.22 as nearly 55% of traders are short. However, since last week, retail has been buying the USDCHF (long positions are up by 13.9%). When retail is short but reduces its exposure, the long term direction remains bullish but the market might have some downside in the short term.

[B]USDCAD –[/B] The ratio of long to short positions in the USDCAD stands at 1.89 as nearly 65% of traders are long. Yesterday, the ratio was at 1.86 as 65% of open positions were long. The SSI is a contrarian indicator and signals more USDCAD losses.

[B]How to Interpret the SSI? [/B]The FXCM SSI is based on proprietary customer flow information and is designed to recognize price trend breaks and reversals in the four most popularly traded currency pairs. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. Conceptually similar to contrarian analyses using the CFTC IMM open position data or COT Report, the SSI provides an alternative approach that is both more timely and accurate in forecasting currency price movement. The SSI is a contrarian indicator that tells you how the market is weighted and where the trend may head. More long positions don’t necessary suggest more confidence in the direction of the current trend. In general, 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.

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