Sorry for being a Debbie Downer but this does not work… You can back test this using Oandas open position ratio historical charts overlaid with price… After studying this I have found that the retail open position ratio is actually a function of price movement not a driver of it.
The ratio actually shadows price movement… What I mean is that if price is moving up, the the open position ratio will actually be less then 50 percent and be moving down because retail traders like hanging on to negative positions hoping that price will come back to them. The retail longs take their profit and exit their trades leaving the ratio skewed by the people who have large stops and holding negative short positions.
From past back testing, the only use for this open position ratio is to identify extremes of 80/20, then use it as a contrarian signal (if 80 percent of retailers are long where do you think big banks will want prices to go?) using fundamentals and technicals for confirmation and entry… Even then though it’s not very useful.
Interestingly, when the ratio is at an extreme, for example when it is 80 percent long, the price action will be showing a strong trend in the opposite direction, in this case downwards… Basically demonstrating that as a group, retail traders do not trade with the trend and get slaughtered as a result… Eventually price will start to go reverse, and as soon as it does the ratio will flop back to the opposite direction as the retailers start fighting the new trend direction.
If you had your heart set on this method, realize that Oandas open position book just aggregates their clients position, a small drop in the water in the whole interbank ocean… I would take Oandas open position ratio, and average it with dukascopy’s position ratio, and Saxxo banks ratio… Search other big brokers for their open ratio as well so you can get a larger view of the market…
Yes, this can work in a ranging market which has been the case for many pairs for the last few weeks, the weakness becomes apparent whenever a pair begins a trend.
I have seen an indicator floating around which does take the ratio from Oanda and inputs it into MT4, however I did not try it out and I don’t think it was supported by Oanda itself.
As far as backtesting goes, Oanda does have the historical ratio information for you to review in their forex labs section.
goldylox, thanks for posting the idea. i am always interested in something that utilizes an uncommon approach, indicator, etc.
i am not at all sure i fully understand what you’re getting at yet. did you find that when retail traders were long, that was the way to go? or, are we finding that going against the retail crowd is what may work? here is a shot, 1 hr chart, gpb/usd, i’ve been watching since mid-day yesterday. total long positions have moved down from about 45% to less than 20% while price has moved up almost 100 pips.
banker, thank you. it seems if we’re going to try to use this, perhaps in conjunction with some other factors, we’re looking at fading the retail crowd. maybe it would be best to note when net positions cross 50%. that is, when we see retail increasing shorts, consider going long, etc. i plan to just watch it for a few more days.
In a nutshell… When you see the retail ratio on longs greater then 60% and increasing, price is in a strong downtrend. When the retail ratio is less then 40% long and decreasing, price is typically in a strong uptrend.
Ratios rarely ever get more extreme then 70 to 80 percent long or 20 to 30 percent long, so if they do get this high or low, then a reversal in price trend is likely nearing and technical reversal patterns should be sought for entry, such as engulfing bars, pin bars, tweezers, or rail tracks.
I have been trading with the crowd.
Today was not a good day. I would have lost money today.
As Banker928 said, the ratio often shadows the actual price. So being aware of this will help.
I have started a new test. Oanda Mixed System | Myfxbook
I am testing a few different systems in this account. If you analyze by magic, Oanda 50/50 is 52345. They are the 0.01 lot sizes.
Here’s an update,
The first trade in the pic I set the lot size to 1 lot by mistake. That is why the big jump. It would have made .3% without the first trade.
There is currently a floating profit with this system of $539.00
In case you are wondering, the other systems I am testing with other magic no’s in the account are using the Oanda data as a filter as to when to trade.
As Banker pointed out earlier often the Oanda ratios shadow the movement when there is a trend. So I have an updated theory.
If there is an obvious trend, only trade with the trend & Only trade when the orders are inline with the trend.
If there is no trend trade with the sheep.
