It can serve as a powerful contrarian indicator, signaling that if the vast majority of traders are piled into one side of a trade, the “smart money” may be preparing to push the market in the opposite direction. While technical indicators are essential for analyzing what the market is doing, they don’t always tell you why. More importantly, they don’t reveal the collective mindset of the other traders you’re up against. It’s the missing piece of the puzzle that bridges the gap between chart patterns and the human element of fear and greed that truly drives short-term price movements. The effectiveness of the IG Client Sentiment indicator can also be seen in the profitability numbers of retail traders. For example, the EUR/USD chart below shows the projectible nature that can occur with IGCS.
Alongside technical and fundamental analysis, IG’s sentiment data can be a useful additional tool for a trader, if they know how to read the changes in positioning. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias. IG’s report updates once daily, and the broker provides client positioning data for a few of the most popular forex markets, crude oil, gold, silver, and a few indices. So, traders don’t have to scratch their heads when there isn’t a massive difference between net long and net short percentages.
Traders should look for divergences between sentiment and price action (movement in a security’s price), as these can often signal potential reversals. Our commitment to providing unbiased, comprehensive reviews of forex brokers is rooted in extensive research and expert analysis. We evaluated 18 forex brokers based on rigorous criteria, focusing on key aspects such as regulatory oversight, costs, trading experience, and available offerings. Our methodology ensures that our recommendations are based on reliable data and a thorough understanding of the industry.
COMPARE PLATFORMS
In the above diagram, price is in a strong uptrend and sentiment is showing over three times more short traders for every long trader, therefore, this can be regarded as a bullish signal. The top section of the diagram shows how price has evolved (green and red candles) and the blue/red sentiment line shows when traders are net long/net short. If there is a large distance between the sentiment line and price, this can be considered as a signal to trade in the direction of the trend.
TRADING
Therefore, when trading on sentiment, traders will find more reliable (contrarian) signals in strong trending markets. We advise you to carefully consider whether trading is appropriate for you based upon your personal circumstances as you may lose more than you invest. You are advised to perform an independent investigation of any transaction you intend to execute in order to ensure that transaction is suitable for you.
Strategies for trading market sentiment
Since traders had become increasingly net-short, it’s no surprise to see the red line well above the blue line for long periods. Returning to the GBP/JPY example, after realizing that most traders are short GBP/JPY, one could reasonably assume that this must be the correct trade to place. By understanding the prevailing mood of the market—whether the “crowd” is overwhelmingly bullish or bearish—you can add a powerful layer of context to your analysis. This allows you to either trade with the dominant force or, more powerfully, identify when the crowd is over-committed and a reversal is imminent. The Commitment of Traders (COT) report contains positioning data on futures traders of varying sizes and intentions. It is released every Friday evening and reflects positioning held for the week ending on Tuesday.
- For example, a sentiment reading for EUR/USD might show that 70% of traders are currently holding long positions (buying) while 30% are short (selling).
- Both brokers offer a highly competitive commission-free Forex cost structure, where ActivTrades has an advantage with lower minimum spreads and costs of $5.00 versus $6.00 at IG Markets.
- Since traders had become increasingly net-short, it’s no surprise to see the red line well above the blue line for long periods.
Trading on Sentiment: Using IG Client Sentiment Data
- IGCS incorporates retail trader positioning (long and short) to formulate a sentiment bias.
- The broker offers actual data on the percentage of its clients who have long and short positions on many markets, mostly in forex, but also in a few indices and commodities.
- Both fundamental and other technical techniques are used to gauge trends, ranges, potential reversals etc. so incorporating IGCS provides another layer of data to help verify a hypothesis.
- Regulated by major bodies like the FCA and ASIC, OANDA is respected for its powerful fxTrade platform and its commitment to providing traders with advanced tools.
In stock markets, monitoring volume changes can provide additional insight into the strength of sentiment. Staying informed about news and developments that could shift market mood is also essential for sentiment-based trading. This tool covers some of the most popular forex markets like EURUSD, EURJPY, AUDUSD, USDJPY, and other well-known non-forex markets such as Bitcoin, Ethereum, US crude oil, and the S&P 500.
We can observe the lines spreading apart at various intervals by comparing the number of net short and net long clients on the axis. IG provides two APIs (application program interfaces), the web API (available for retail traders) and FIX API (available for institutional traders). To get the first API, you need to go onto the IG Labs website, create an account, generate an API key and connect this AP using the broker’s Excel app.
Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs. By looking at the change in positioning for EUR/CHF below, the daily change in net-long positions is -9%, with a weekly change of -8%. Meanwhile, the daily change in net-short positions is -20% with a weekly change of -39%, which means that clients are further net-short relative to the previous week. Yes, you can install all our free indicators and apps in an MT4 demo to test-drive them without committing any capital.
There is also a fee for guaranteed stops (available to clients outside of the U.S.) that also depends on the underlying asset. IG offers competitive fees globally, with spreads as low as 0.6 pips for major FX pairs, 0.8 on leading indices, and 0.1 on commodities. The “Refresh” button on this tool refreshes the data, providing you with the latest information for FX Sentiment indicator. In this tool, we have aggregated data from multiple sources to enhance the overall effectiveness and potential output. While IG Client Sentiment is a useful tool, it doesn’t mean that it’s perfectly predictive.
Clear Signs It’s Time to Leave a Blackjack Table
For example, a technical trader might identify an important support level on a pullback in a currency pair that is not only trending higher but also has a bullish sentiment signal (the crowd is short). The independent factors (support in uptrend & sentiment) have merit on their own, but together they can combine for a more rounded approach that provides a stronger trading edge. The two most well-known are open interest in options, which largely applies to stocks and the Commitment of Traders Report (CoT). IG Client Sentiment (IGCS) is a tool that traders can use in conjunction with a broader technical and/or fundamental strategy. IGCS incorporates retail trader positioning (long and short) to formulate a sentiment bias.
This is represented in percentage form (see image below) which aids traders in identifying market imbalances that could lead to possible opportunities. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CHF-bearish contrarian trading bias. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.
These sudden shifts in momentum are caught in real-time by IG Client Sentiment data and can help put traders on the right side of the trade early in a price move. Right away you might see one of the big limitations of using this type of information – its not timely, at least not for short-term traders. Having a once-per-week update that also has a lag from the last day the data is reported forex ig client sentiment (Tuesday) to when the data is released to the public (Friday), makes it an intermediate to long-term sentiment gauge. Traders should consider bullish directional bias until there is a cross between the two.
Advanced algorithmic traders can connect their solutions to the ActivTrades and IG infrastructure via API, and both brokers maintain dedicated institutional divisions. In general, IG does an excellent job of providing existing and prospective users with key information, highlighting the company’s commitment to excellent customer service. IG stands out for being very transparent about its fee structure, making it easy to find how much you can expect to be charged for trading different financial products on the platform. Commissions on shares vary from region to region, while the overnight funding rate varies depending on asset class. Another way of viewing the degree of sentiment is to consider the ratio of long to short traders.
Along with IG client sentiment data, this would have given extra confirmation to look for buying opportunities going forward. To understand why this type of indicator can be powerful, one needs to grasp the sentiment concept. In any tradable financial market, the two most common strands of analysis are technical and fundamental. Most CFD and spread bet traders tend to fade momentum – selling in an upward-trending market and buying into a downward-trending market. It’s human nature to try and look for relative bargains, and thus we might look at a market which has fallen sharply in value and buy. Of course, IG is not the only broker publishing summaries of their client’s positions in the markets, though only a handful does.
If there is a large distance between the sentiment line and the price, this can be considered as a signal to trade in the direction of the trend. To make the analysis easier, DailyFX provides a comprehensive report on major markets, showing IG sentiment overlaid on price. To get the full report, navigate to the sentiment page and click on the Green button labeled, “IG Client Sentiment Report”. Taking a look at the NZD/USD chart below, it is clear to see an overall downtrend despite retail traders remaining strongly net long. This seems counter-intuitive but reinforces the notion that retail traders tend to be trend fighters. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.