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How to use IG client sentiment
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by David Rodriguez and Ilya Spivak, Senior Strategists for DailyFX
drodriguez@dailyfx & Twitter/DRodriguezFX
ispivak@dailyfx & Twitter/IlyaSpivak
How to use IG Client Sentiment in your trading
by David Rodriguez and Ilya Spivak, Senior Strategists for DailyFX
Hello traders and welcome to our guide on IG Client Sentiment—an excellent tool to gauge trader positioning and sentiment in the FX market.
Traders commonly use two tools to help them work towards these goals: fundamental analysis, which is the study of economic and geopolitical trends, or technical analysis, which is the study of price action through charts. Often they use a mixture of both techniques.
There is nonetheless another tool which could add considerable value to trading decisions: market sentiment. And with the IG Client Sentiment indicator we have a virtually-unparalleled view of trader emotion across key markets.
What is the IG Client Sentiment Index?
We use real trading data from IG, the world’s number one spread betting and CFD provider 1 , to show trader sentiment across key markets.
If you’re trading on the stock or futures markets, which are centralized, data on market sentiment is relatively easy to get – from tools such as the ‘commitment of traders report’, ‘odd lot theory’ or the ‘put-to-call ratio’. But these reports are most often on a delay, may require expensive licensing fees, and/or give an uneven view of how the majority of traders are actually positioned in a given market.
IG’s Client Sentiment data helps fill this gap, and you can access to data in real-time on DailyFX and via our client- exclusive site, DailyFX PLUS. How might we use this data in our trading?
1 Based on number of active UK financial spread betting accounts (Investment Trends UK Leveraged Trading Report October 2016) and on CFD revenue excluding FX (published financial statements, October 2016).
Reading the Chart and Interpret the IG Client Sentiment Index
When you visit DailyFX you will see a number of charts and statistics on the IG Client Sentiment Index, and they will take two forms. First is the one in the preceding example:
In the top of our chart we see a FTSE 100 price chart overlaid with our sentiment data. The candlestick chart displays price data in a familiar format. Note that the scale for the price index on our Client Sentiment charts will always be on the left:
Next is the sentiment overlay on the same chart, but this time we display two new tools: the Percentage of Traders Net-Long the FTSE 100 and the Percentage of Traders Net-Short. Here our scale for sentiment is always on the right.
The blue area represents the Percentage of Traders Net-Long the FTSE 100, while the red area represents the Percentage of Traders Net-Short. When the traders net-long outnumber those short the centre line is a thick blue, and if traders net-short outnumber longs the line is red. In this way, we can see at a glance whether most are long or short.
Finally, the bottom chart shows us the actual Number of Traders Net-Long and those Net-Short—giving us a clear picture on whether traders are actively buying and selling at any given moment.
The direct overlay of client sentiment onto price data allows the trader to track both in tandem. And indeed by studying these charts it is easy to see how market prices and sentiment are most often quite correlated.
We also display client sentiment across a broad range of markets in a simple summary table: Users can find this table in daily updates on DailyFX PLUS as well as via our DailyFX Real-Time News page. Reading it is straightforward: the top section shows the current percent of traders long/short per-market while the bottom shows key changes.
We’ll note that there are three percentage markers different to the others in the above chart—at 33%, 50%, and 66%. At 33% Percentage Long, there are two traders short for every one long. At 66% there are two traders long for every short. The 50% mark shows at which point the majority of traders is either net-long or net-short.
In this particular example, we can likewise immediately see the two most extreme sentiment readings: traders are heavily net-long Spot Silver as nearly 90% of traders are long, while traders are heavily net-short EURGBP with nearly 80% of traders short.
Disclaimer
High Risk Investment
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can
work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives,
level of experience, and risk appetite. The possibility exists that you could sustain losses in excess of your initial investment. You should
be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any
doubts.
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Past Performance
Past performance is not indicative of future results.
