Nearly 65 percent of traders are short EURUSD and many investors are leaving their protective stop-losses slightly above 1.43. Under these circumstances is very risky to take additional shorts in the EURUSD. In fact, because foreign exchange traders are usually highly leveraged we may see a sudden rally in the EURUSD propelled by a short-squeeze and a series of margin calls.

EURUSD - The ratio of long to short positions in the EURUSD stands at -1.86 as nearly 65% of traders are short, according to the FXCM SSI which measures the positioning of thousands of retail traders. Last week, the ratio was at -2.07 as 67% of open positions were short. So, retail traders have been buying the EURUSD and long positions are up by 28.4% since last week. The SSI works the best as a contrarian indicator, in particular during trending markets, and since the retail crowd is net short we may see more EURUSD gains going forward.

How to Interpret the SSI? 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 donâ€™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.

GBPUSD - The ratio of long to short positions in the GBPUSD stands at -1.38 as nearly 58% of traders are short. Yesterday, the ratio was at -1.16 as 54% of open positions were short. In detail, long positions are 2.2% lower than yesterday and 37.1% stronger since last week. Short positions are 16.3% higher than yesterday and 6.8% stronger since last week. Open interest is 7.8% stronger than yesterday and 20.4% above its monthly average.

USDJPY - The ratio of long to short positions in the USDJPY stands at 1.26 as nearly 56% of traders are long. Yesterday, the ratio was at 1.75 as 64% of open positions were long. In detail, long positions are 11.1% lower than yesterday and 10.3% weaker since last week. Short positions are 23.8% higher than yesterday and 33.2% stronger since last week. Open interest is 1.5% stronger than yesterday.

USDCAD - The ratio of long to short positions in the USDCAD stands at 2.90 as nearly 74% of traders are long. Yesterday, the ratio was at 2.92 as 74% of open positions were long. In detail, long positions are 0.7% lower than yesterday and 12.8% stronger since last week. Short positions 13.3% weaker since last week. Open interest is 0.5% weaker than yesterday and 26.7% above its monthly average.

USDCHF - The ratio of long to short positions in the USDCHF stands at 2.69 as nearly 73% of traders are long. Yesterday, the ratio was at 3.40 as 77% of open positions were long. In detail, long positions are 10.3% lower than yesterday and 11.0% stronger since last week. Short positions are 13.3% higher than yesterday and 1.4% stronger since last week. Open interest is 4.9% weaker than yesterday and 21.9% above its monthly average. The SSI is a contrarian indicator and signals more USDCHF losses.

AUDUSD - The ratio of long to short positions in the AUDUSD stands at -1.29 as nearly 56% of traders are short. Yesterday, the ratio was at -1.31 as 57% of open positions were short. In detail, long positions are 1.7% higher than yesterday and 14.3% weaker since last week. Short positions are 0.4% lower than yesterday and 6.6% stronger since last week. Open interest is 0.5% stronger than yesterday and 3.8% below its monthly average. The SSI is a contrarian indicator and signals more AUDUSD gains.

NZDUSD - The ratio of long to short positions in the NZDUSD stands at -1.08 as nearly 52% of traders are short. Yesterday, the ratio was at -1.19 as 54% of open positions were short. In detail, long positions are 9.0% higher than yesterday and 8.4% stronger since last week. Short positions are 0.9% lower than yesterday and 20.1% stronger since last week. Open interest is 3.6% stronger than yesterday and 10.9% above its monthly average. The SSI is a contrarian indicator and signals more NZDUSD gains.

Antonio Sousa is a Chief Strategist for DailyFX.com at Forex Capital Markets in New York City where he performs global economics research and develops systematic trading strategies. To contact him please e-mail <[email protected]>.