SSI: The Speculative Sentiment Index thoughts

Okay so this SSI data released by FXCM each week has got me going crazy.

They say its contrarian so if 3 times as many people are buying AUDUSD then I should be selling it. Basically if 95% of people lose money then I should do the opposite…

Well firstly I wasn’t sure this is true. i have read that the majority of retail traders actually trade in the right direction but lose because of not letting profits run and staying in losing trades too long.

Source Forex Education: Why do Many Traders Lose Money? | DailyFX

This idea proves this SSI logic to be completely wrong.

However… it looks like the proof is in the pudding and the SSI is right.

You can then see the chart which indeed shows a downtrend all year for AUDUSD.

I wonder to myself how on earth are so many people buying it into a downtrend.

But then I realized that the data is only useful for long term traders. For example the AUDUSD has been in a 2 week retracement so if i’m a day trader I indeed want to be buying AUDUSD not selling it.

This means that I do not always want to be doing the opposite to most people… The SSI sentiment appears to be focused on the long term which means little for day traders…

What I find amazing is that when the AUDUSD downtrends in the year the amount of buying goes up compared to when the AUDUSD ranges…

This defies logic. Or does it!

I thought of only one explanation for this. People are all trying to pick bottoms to get in reversals and they are always wrong. The trend is indeed your friend. This explains what we see here.



If you look at both pictures here you can clearly see the increase in buying during downtrends and reduced buying on retracements. I have marked with red lines where the time frames align.

What do I conclude from this?

  1. Following the SSI contrarian logic when day trading is not a good idea. As I said, a retracement could be weeks long so there will be plenty of buying opportunities there when looking to open and close trades in the same day.

  2. I can only assume the majority are trying to pick bottoms all the way down…

Does any one know whats really going on ?

I actually think I understand it now. Traders are winning more trades than they lose as the linked web page suggests. These trades are likely smaller time frame reversals against the intraday trend (picking tops/bottoms). Then what must be happening on top of this is that they are not letting profits run and they stay in losing trades too long.

Combining these things would explain what is happening.

So I should not try to pick tops and bottoms, only trade the “intraweek” trend regardless if that may be up or down and regardless of the daily/weekly trend. It’s too big to effect day traders…

So i’m not sure it’s worth paying attention to the SSI. If the majority of retail traders are getting it right more often than not, the idea of trading against them makes no sense. The SSI output is just revealing that most retail traders are counter trend traders.

I did a good job at answering my own question.

YouTube 2:40 explains exactly what I was thinking.

Hi Epidot,

You did a great job answering your own question! :22:

Many retail traders try to pick tops and bottoms and go against the trend. That’s because they are uncomfortable buying at highs or selling at lows. The result is that when a currency pair is trending, the majority of retail traders tend to go against that trend and SSI can provide useful signals about the likelihood of the trend to continue.

An option would be to use SSI as a direction filter and something else as an entry/exit criteria. SSI itself cannot give you entries and exits that will cut losses short and let profits run, but moving averages or price channels or other entry/exit systems will. You can simply trade a system in the direction against the majority of retail traders as indicated by an SSI.

-Adrian

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Great points, Adrian!

Speaking of entries and exits, I find that the relative change in SSI to be useful for this. Before I buy a given currency pair, I like to see an increase in the number of short positions. Similarly, I like to see an increase in the number of long positions before I sell.

As an example, let’s take a look at the latest SSI readings for GBP/USD. The ratio of long to short positions in the GBPUSD stands at 3.06 as 75% of traders are long. Yesterday the ratio was 2.79; 74% of open positions were long. Long positions are 8.4% higher than yesterday and 32.3% above levels seen last week.

SSI is a contrarian indicator to price action, and the fact that the majority of traders are long gives signal that the GBPUSD may continue lower. The trading crowd has grown further net-long from yesterday and last week. The combination of current sentiment and recent changes gives a further bearish trading bias.

Thanks I have looked into this alot and understand it. However I see one problem with SSI. It’s based on a sample size. When comparing DailyFX, MyFXbook and Oanda they often show completely opposite sentiment… This cannot be good.

Sometimes yes they align within 10% or so but often they clash which means taking a bias all depends on the broker Order flow you happen to be looking at.

Thoughts on this?

Anyway, my strategy will begin with two main things. SSI and Recent Strength. The goal being to trade a currency pair that has one strong and one weak currency but also a clear market bias.

Thanks

As more and more traders use the SSI do you think the results will become less accurate?