Yesterday there weren’t any particularly important news events, but in the 5 minutes timeframe it was still possible to catch a few moves with the Alert System. Below you can find the session’s resume, with the comments on why each trade was taken, and why they were closed.
EUR/USD 5 Minutes – Dynamic Trend SHORT Alert
- Short on dynamic trend alert (sell market order). Placed the SL and TP at the suggested levels.
- Closed 1/2 trade at the blue dot level
- It hit take-profit about 1 hour later, for +15 pips
USD/CAD 5 Minutes – INVALID VSA Signal Alert
This VSA signal was invalid and wasn’t taken due to:
- Mixed supply/demand signs at this price level. When this happens, avoid taking long or short trades
- Long-term resistance just above
AUD/USD 5 Minutes – VSA Signal SHORT Alert
This short trade was taken at the suggested execution price, and the stop-loss and take-profit set at the suggested levels. The alert was valid, but soon the market started to show strength.
- Short as sell stop-order at the execution price
- There was a churn bar, which is a demand sign in this context (during downtrend). 1st sign of strength
- Low volume bars on a 2nd attempted movement. CLOSE trade here, on the 2nd sign of strength. The trade closed barely BREAK-EVEN
EUR/JPY 5 Minutes – VSA Signal LONG Alert
- Long as buy stop-order at the execution price
- Close on the TAKE-PROFIT for +10 pips
If you have read the VSA user guide before, you might have noticed that there is actually distribution by the end of the Tokyo’s session, before this alert took place. So shouldn’t we avoid taking long trades? To go long after distribution, you want to see signs that there is no more supply to take prices lower, and that’s exactly what happened in EUR/JPY. The market went lower on low volume, and the VSA signal was actually a supply test which was successful. The alert was still valid because of that reason.
Hope you found this trading session review useful. Try our demo if you want to see some of the indicators in action, and do subscribe to our blog to receive new market updates.
To do sentiment analysis in Forex, the Speculative Sentiment Index (SSI) is a tool that can be used to understand how different traders are positioning themselves in the market. Continuing with the articles already published on the role that the Commitment of Traders (COT) Report plays in the market, on the analysis of Market Profile and the assessment made of the Money Flow Index, this text will address the interesting topic of sentiment analysis, with a focus in Forex. It will do so mainly by understanding what it is and how traders can read it.
What is the Sentiment?
Sentiment is about spotting traders’ positions, to ultimately understand how they are thinking, and how to take advantage of it. The most used indicator that can be used to understand where retail traders are positioned in the market is SSI. It comes in different forms and formats, but the main idea that traders need to understand when they are using it is that its main purpose is to capture potential opportunities for contrarian trading. And this is so because it allows us to identify where the herd is.
The herd is a pejorative term normally used to describe retail traders. As was explained in our previous analysis of the COT Report, there are mainly three types of players in the market: hedgers, big institutions and small institutions and retail traders. As was also explained, by understanding where retail traders have their positions, new opportunities for contrarian trading open themselves.
Supporting the SSI is, therefore, the way that the markets function from a psychological standpoint. Small and inexperienced retail traders tend to be driven much more intensely by greed and fear. They let their emotions get in the way much more often when compared to professional traders.
The reasoning behind the way these traders operate is very simple, therefore. When the market is clearly on the way up they buy. When the market is clearly on the way down they sell. Greed gets in the way of their reasoning.
The SSI allows us to understand where these traders are – and as more experienced traders to benefit from this knowledge.
How to Use the SSI for Sentiment Analysis?
SSI is the prime indicator to do sentiment analysis (although there are others such as the COT report, for long-term trading), but acquiring the SSI in the form of an indicator, for Forex, does not come cheap. Unfortunately we cannot have access to it via MT4 and so traders can’t always see whether they apply to their trading style unless they actually sign up for one of these platforms that provide this service.
One such broker is FXCM and in this last section we will use their indicator as the starting point to explain how to read the SSI. The indicator can easily be accessed on this website:
It shows the positions of retail traders in different financial instruments. From the difference between the number of traders holding long positions and those holding short positions, it establishes a percentage. When this number is above 0 it means that retail buyers with long positions prevail over the same type of traders with short positions. The same happens in reverse – when below 0 short retail traders are prominent.
So what can be extracted from this particular conclusion: when disparities between these two positions are higher, traders should be on alert for a potential reversal in the market.
How useful is this information? Well, we need to be aware that as with any other indicator the SSI is not the holy grail for trading. Here at ANALYTICAL TRADER, we consider it a relevant indicator but certainly not the most relevant one.
Nonetheless, the SSI is one of the most relevant indicators to understand where retail traders are in the market. And just because of this it certainly deserves our attention.
Continuing with the analysis that sentiment and volume play in the financial markets, in this article we saw how to do sentiment analysis using SSI. This indicator provides a very efficient way to understand where the herd is. When values are above 0 it means that there are more retail buyers in that particular position, and vice versa. In another article we will suggest different ways to trade using the SSI.
If you want to know more about how to trade using volume do subscribe to our newsletter or try our volume indicators – and start your trading journey with us!
When we think about how to measure volume in the market one of the key indicators is Market Profile. This indicator not only plays a role in determining what kind of day the trader will be confronted with but also provides us valuable clues and potential opportunities to trade. We will explore in this introduction to market profile these two issues.
What is Market Profile?
The indicator was the result of the ingenious work of J. Peter Steidlmayer that first suggested its use in the 1980s. The idea behind it was to understand precisely how different market conditions can be assessed through the use of three core elements: price, time and volume.
Throughout a trading day different orders to buy and sell a particular financial instrument – be it currencies, stocks, commodities, etc. – are placed on the market. This indicator uses a mathematical formula that tracks precisely how these moves occur.
Whenever these orders are placed on the market a value area is established. And this area represents an equilibrium between the forces of demand and supply. The distribution of these forces forms a normal distribution curve.
The main driver of changes within this distribution curve is, of course, volume. Pick periods during the day make the distribution curve move towards a different value area. And it is precisely these move that traders are concerned about.
The key to understanding the importance of market profile is, therefore, to follow the moves from value area to the new value area. The main driver of these moves is volume. And what new value areas allow us to understand are new ranges within which prices will tend to oscillate during that trading day.
If you want a free version of this indicator for Metatrader 4/5, you can download it here.
How it Works: The Formula behind the Indicator
Market Profile is constituted by what are called Time Price Opportunities (TPO). Within a specified time period – 30 mn, 1 hour, 4 hour, etc – a different letter is associated with a new condition of the market. These letters are in themselves representatives of volumes of orders.
The market picks at what is called Point of Control (POC) – this is the row where the most number of TPOs were registered with the most volume associated. And this is the area that traders should be carefully considering because it settles the value area that will most likely be associated with a particular day.
Prices will tend to pick at a particular POC, establishing a particular value area and then oscillate around those numbers.
Identifying Trading Days through Market Profile
But how can we use this indicator – is it at all possible? Throughout this text, some hints were already stressed on how to take advantage of this data but now is time to look at this issue in a bit more detail.
Whenever the day starts or whenever there is a big spike during the day established, for example, by a big news announced or some other event, it is commonly understood that these events will drive the value area to a particular point. The question becomes whether this trend will continue, whether the market will stay choppy or whether we will see a complete reverse of this trend.
Through the use of Market Profile we can, therefore, identify different types of days and these can be explained precisely because of the establishment of new value areas:
- Trend days – when a particular value area is constantly being redefined in the long direction or short direction
- Semi-trend days – when an events cause a sudden move in the market but the trend stagnates
- Choppy days – when no directional move in the market is recorded and the value areas do not change enormously throughout the day
- Semi-reversal days – when we see a directional move in one direction or the other but that move is completely shaken by a partial reversal. The day ends up being choppy but towards the opposite side of the initial move
- Full reversal days – the market makes a strong directional move that is completely nullified by a move towards the opposite side.
Trading Using Market Profile?
If traders need to be aware of different types of days – and can spot these different types of days through an analysis of the POC – they should also understand that trading using Market Profile demands a broader understanding of this indicator.
Market profile is particularly useful in trading ranges and reversals – it doesn’t do so well with trending days. It also should be used in intraday timeframes, from 1 hour and below.
As indicated, POC – and the associated value area – can change throughout the day. Surrounding the POC area are, however, extreme values. One could say that they represent the boundaries of price volatility during a particular day. Surrounding the POC are therefore two boundaries: the upper extreme and the lower extreme.
Traders can take advantage of this information and trade whenever price hits particular extreme boundaries. For example, a reversal trading opportunity would occur if price moves to the lower extreme and we see a drop in the eagerness to sustain this move further to the downside by traders. This drop would be registered in the Market Profile indicator.
Traders could place buy orders at this extreme with a very short stop loss just below this point. As a target, the other end of the extreme – in this case the upper extreme – should be used.
We strongly suggest however to align this approach with a more consolidated understand of other forces in the market, such as more immediate supply/demand signs. The use of market profile is therefore just one tool that can be looked at in order to fully optimize our investment opportunities. Other elements such as volume analysis should inform traders when they make trading decisions.
If you want to know more about how to trade using volume do subscribe us or try our volume indicators – and start your trading journey with us!
COT Report (Commitment of Traders Report) is one of the most relevant pieces of information when it comes to understanding the role that volume plays in Forex. It is published by the Commodity Futures Trading Commission and released every Friday, around 2.30 pm EST. But why do so many people speak about the COT report? In order to understand this general question we need to address four issues in this guide: why is it relevant, where to find it, how to understand the COT report and, finally, whether or not a trading strategy is possible with information extracted from the report. Let’s start with the first question.
Why is the COT Report so Relevant?
When we are trading any financial instrument some of us tend to be concerned with the role that volume plays in driving price. But how can I have a better understanding of this issue?
If in markets such as stocks the volume can easily be identified by everybody, in other markets such as Forex there is no day-to-day indication of the volume that is affecting the market. One way to understand this is, therefore, by looking at the COT report.
Forex transactions are normally made over-the-counter. And this essentially means that they are done on a daily basis and without the formal registration in one big aggregator of data such as the Chicago Mercantile Exchange of the real players and real investments involved. Without the collection of this information, it becomes almost impossible to accurately understand where the volume in the market is.
What the COT report allows is, therefore, for an understanding of this question. And this is so because its main purpose is to register what happens in futures markets. These types of markets are ones where traders need to keep their positions open for more than one day – so it becomes inevitable that entities that regulate this market understand what is affecting price volatility and who is affecting price volatility.
By having to keep their positions open for more than one day, traders in these futures markets allow us to understand where volume is.
Where to Find and Terminology: the Commitment of Traders Report Explained
There are two ways to find the COT: the traditional way and the modern one. Let’s start with the first one.
The official report can easily be found in CFTC website through this link.
Once the document is downloaded – look for Currency Legacy Report / Chicago Mercantile Exchange – Futures Only / Short Format – don’t be scared with the information. Just search for the particular instrument you want to look at and that’s it.
More relevant is to decipher some important terminology in this report. Let’s do it here then:
Commercial – These are big businesses that use the futures market to hedge against some other investment.
Non-commercial – Mixture of retail, hedge funds and financial institutions that play the game not to hedge but to win.
Short – Number of positions open that are selling futures contracts
Long – Number of positions opens that are buying futures contracts
Open interest – These are orders that were not yet executed
But even though we would recommend you to go through this traditional route so you understand all the terminology used and get a better grasp of what really constitutes the COT report, there is another way that you can use.
A simple indicator can be used to understand how the COT report is affecting different currencies. This indicator can be accessed on Finviz.
What is showed here are different currencies and the weight each type of trader has in these different currencies.
How to Read the COT Report?
Once we understand key terminology it’s time to address probably the most important section of this article: how can I read the information contained in the COT report? The report gives us important information about three main players that represent three main market positions.
Hedgers or Commercial Players – These are all those that aim to protect their positions in futures markets because they want to hedge against some investment made in another financial instrument. Their interest is not to make money but to hedge a particular position.
These are contrarian traders and the reason for that has to do with their own self-interest – for example, since they want to hedge a particular long position in a particular financial instrument, they understand really well when things can turn. Commercial players or hedgers are therefore bullish at market tops and bearish at market bottoms.
Large Investors. These are the traders you want to be following. They are the sharks of trading, and trade to make money on speculation. They also tend to add to their positions along the way – and this reinforces the powerful effect of the trend.
Small Investors – These are all those hedge funds or retail traders that own small trading accounts. The most relevant information about small investors is that they tend to be on the wrong side of the market.
They normally buy when the market is at the top of the trend, and sell when the market has no more room to go to the downside.
Is a Trading Strategy based on the COT Report Possible?
Can we use the Commitment of Traders Report for a trading strategy? Previously we have discussed three important questions regarding the Commitment of Trader’s report: why is it relevant, where to find it and how to understand the COT report and finally what is its main message for us as traders. The last important topic to address is the link between the COT report and trading strategies: can it be used as a tool to trade?
Like so many other indicators, the Commitment of Traders Report can, in fact, be used as a tool to trade if we fully understand – and read correctly – where volumes of the market are and where the different positions of the different types of investors that characterize this report are.
Having understood that this report allows us to identify three main types of traders –hedgers, large and small investors – we can use it in our trading in two particular occasions:
Reversals (Type One) – When the spread between commercial hedgers and large investors is big, then we should expect a market reversal.
This can easily be explained by understanding that large investors are normally accumulating their positions around key reversal points. When this happens this in and off itself is a sign of a potential reversal. If the spread between the Large Investors and Hedgers is high, and it reaches a peak, then it means that we are in a tipping point towards a potential reversal that we can catch in its infancy.
Reversal (Type Two) – A subtle trading strategy looks at the importance of large traders in determining where the market will go next. When large traders start to reverse their positions (i.e. the large investors line’s trend starts reversing), we can expect a market reversal most of the times.
Finally, what can we expect from this indicator? While it’s very useful to spot trends reversals, the COT report does not provide a holy grail to trading. First, this information is more relevant for long-term trades; second, it needs to be complemented by other information and knowledge of other forces that move the market.
If you want to further understand how to correctly identify these forces and to correctly understand market sentiment keep following our comments in the blog, or look at our indicators and take advantage of successful trading strategies.
Aussie Dollar (AUD) pairs are showing some temporary weakness in the 15 minutes to the hourly timeframe, which may result in a short-term reversal. In this post, I analyzed the market’s supply and demand on the 3 of the most traded AUD pairs: AUD/USD, EUR/AUD and GBP/AUD.
In this pair there was supply at new highs, which often pinpoints the beginning of a downtrend – in new (relative) market highs, there just isn’t trading due to old resistances, and so any supply sign tends to carry more weight. Before looking for a short I would like to see another descending top (lower than the last 2) on low volume, a downtrend confirmation.
Note: Non-farm employment change and unemployment rate numbers are coming out tomorrow for USD at 1:30 PM GMT
In EUR/AUD Hourly chart, the price is still moving in sideways, but the volumes are telling another story. They spiked on the market lows, which means there was mostly demand in the last 2 days. A low volume rally to 1.44 would be the trigger for a high probability long trade.
This pair is near a long-term support at 1.68, and just showed a major shake-out (blue dot). It’s probable that it may form an inverse head-and-shoulders, that given the accumulation, would show strength. Even if that doesn’t happen, though, a dip to around 1.687 (previous low) on low volume would still give a long opportunity with a favorable risk:reward.
In this trade, I went short after VSA gave a weak signal, together with the weak background + weakness nearby for quick 30 pips. It’s usually a strategy that works in London open, as volumes tend to spike at these hours.
Taking the VSA signal at London Open
- The background analyzes both the trend and supply/demand signs in the market. In this case, it was showing that the market was weak, which means you should be looking for shorts
- The market showed weakness behind, seen by the wide high volume (red) down bar, closing on the lows. This is a supply sign, that is even more important during a downtrend.
- Finally, a weak VSA signal (minor supply) triggered the trade, and a sell-stop was used at the bar’s low.
By the year’s end, volatility is certain, and coincidentally, there are usually many trading opportunities across Forex pairs. This year is no exception, and we found 3 trading opportunities among the 4 major pairs, which can possibly be taken by January/2017.
EUR/USD (-4.29% year-to-date)
Euro/Dollar just broke an important support at 1.05, and it’s very close to reaching parity, currently at 1.038. The support was broken following major supply in November, and it kept showing selling volumes on the way down, and during the breakout. After a short-term rally on low volume just before Christmas, it keeps heading lower. Despite the historical lows, solely based on the market’s supply and demand, it’s a good time to short it.
Daily background: Weak
GBP/USD (-17.15% year-to-date)
There was a selling climax, just before the October’s rally surged. Most recently, at November and December though, the Sterling/Dollar has been showing supply, and the short-term support 1.21-1.23 won’t probably hold. The ultimate support is 1.20, and if there are no significant changes such as VSA demand signals, aim to short in the breakout.
Daily background: Weak
USD/JPY (-2.05% year-to-date)
Following an accumulation consolidation, that lasted for 5 months, USD/JPY started a major uptrend. To trade the daily, there should be a retracement first, to around 114. There are no resistances ahead, and so an uptrend still has much room to go.
Daily background: Strong
USD/CHF (+3.00% year-to-date)
Similarly to the Yen/US Dollar, USD/CHF also went through an accumulation process mostly due to the strength in the US dollar. The rally has been showing good volumes, and as it’s just approaching an important resistance at 1.032, a breakout would be a trigger for a long trade. The next important resistance is at 1.17 which gives enough room for a favorable risk:reward.
Daily background: Strong
If you wish to trade EUR/USD with our indicators for free, you can try it here.
This trade was taken in the 5 minutes timeframe at the today’s London session. There were 2 things going for the trade:
- The background was strong at the time
- There were multiple demand signals nearby (strength)
But sometimes the market only gives 1 shot, and this was one such example – the opportunity was missed when there was a down bar with about average volume. The trade was taken when the rally was already underway, and the volumes were drying up.