My first trade was made yesterday based on market sentiment. I entered short on the NZD/JPY pair. Here are the reasons why:
- As I said I will emphasize the importance of the COT report (as I do not know any other valuable sentiment measurement tools). I checked the data which came out last Friday (2014.05.20). This data contains the net long and short positions for the different currencies.
I searched for currencies where I can find an imbalance in market sentiment. I found out that 17.53% of the speculators were long on the JPY and the rest of the 82.47% were short. I came to a similar concusion with the NZD however to the opposite direction: 15.79% of the people were short and the remaining 84.21% was long. Now both of these currencies ring me the bell and the questions came automatically: if everyone is short on JPY already, then who is going to be still selling the currency? And at the same time: if everyone is bullish with NZD then who can push the price higher up?
I decided to check the fundamental factors but the NZD/JPY short setup started to line up.
- Fundamentals
Although the tax rate increase made many traders bullish on JPY the recent economic data (higher than expected GBP and inflation) and risk aversion (tensions in Russia-Ukraine and Lybia) resulted in supporting the JPY. On the other side NZD was/is bullish for a longer period of time because of the rate hike (3.0%), but the currency is getting too strong and the economy does not provide great data recently. The only one reason against being short on this pair is the great carry-trade opportunities for NZD longs (3.0% kiwi vs. the yens’ 0.0%).
After seeing all these factors I entered a very small position to see how it works in practice. I went short on NZD/JPY on market price: 87.54. At the moment, the trade is doing fine, I have made 66 pips so far. I moved my 50 pips stopp loss 4 pips under my entry price so I will definitely not go negative with this trade.
As I still figure out how to trade market sentiment I have a bit problem with my exit point. I do not want to get out only because of a negative economic report or weekend risk. I definitely want to wait until late Friday and check out the new COT report to see what it indicates. Then I will have a view what the new informations tell about the current net long and short positions and make my decision if I stay in the trade or not. As I already locked in a minimal profit, I cannot risk much and at the same time I can test the strategy.
If you have improvement ideas or are in trades because of the sentiment analysis, I am waiting for your feedback and suggestions.