Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we will be discussing the speculative sentiment index and it’s relevance within the forex market. Over time as we learn to understand and implement indicators into out analysis, you will have noticed some similarities between them.
Mostly all indicators are based on historical data, and this categorises them as lagging indicators, this means that the information we receive is not in real time and therefore delayed. Past prices do not perfectly reflect future price movements and there in lies a serious flaw within lagging indicators.
In order to gain a more predictive outlook we may look to our leading indicators! The Speculative Sentiment Index is one of the few and lets now take a closer look into what it is and how it works.
What is SSI?
What is SSI? The Speculative Sentiment Index, or SSI, is the accumulated data from real time traders with positions held in the market. The data is collected and shared by individual brokers as there is no central exchange so when sourcing the data you may want to do so through multiple sources.
The positioning statement, is a measure of the number of traders holding long positions in a currency pair versus the number of traders holding short positions in the same pair. If it your first time hearing about this that should excite you.
Updates are issued periodically and they provide us with a number of statistics which include the positioning which our ration of long to short, open interest, and the daily change in long and short positions.
Next we look at How to Use SSI Positioning?
The positioning statement of the Speculative Sentiment Index is one of the more utilised aspects of the report, as we discussed this is where traders can observe the number of traders long in a pair versus the number of traders short in a pair.
As we can see here, This pair is showing a current reading of -2.81 So for every one trader that is holding a long position in this pair, there are 2.81 traders that are holding short positions. Any Reading that is a minus figure indicates a net short position in the pair, while readings that are above zero indicate that traders are net long in the pair.
SSI is a Leading Indicator that is referred to as contrarian. The reason for this is that you are using it to intentionally go against the majority of retail traders orders.
If we observe a net long position in the USDCAD, this can be perceived as a sign that taking a short position may be optimal. The reason for this is not because the 4.7 traders that are long in the pair for every one short are wrong, but because at some point the 4.7 traders that are long in USDCAD will need to close their positions, Or in other words they will need to sell. The traders that are short in the pair will need to do the same, and to close their short positions, they will need to buy.
This means that at some point in the future we can expect 4.7 units of supply entering the market, for which there may be only 1 unit of demand from short positions buying to close. What this means is that there could be potentially greater selling pressure than buying pressure and we may look to take advantage of this pressure by opening short positions within the relevant pair.
How we use SSI
Applying The Speculative Sentiment Index to our forex strategy can be a powerful strategy enhancer when done right. Even though it’s one of very few leading indicators we have to hand and very accurate when done well, it doesn’t mean it’s always correct.
For those that wish to incorporate SSI in their trading, we may wish to first locate strong trends, and then use the SSI indicator to filter our strongest set ups.
For example! When we looked at the US dollar Canadian dollar example earlier, SSI was at 4.7 which would be a bearish signal considering that more selling pressure may be in the future of the pair than the available buying pressure.
If we observe readings such as the 4.7 on the USDCAD while the pair is in a long term down trend, we can interpret this to be seen as an opportunity to short the market.
We can look to execute the short positions in a multitude of ways when looking for confirmation.
Usually this is based in our preferred technical analysis. Some traders may prefer to enter using methods such as volume spread analysis or possibly wait for price to move up to an intra-day resistance levels in order to trade the rebound in anticipation of the short.
In terms of looking for opportunities with imbalance in the indicator, the general rule for the speculative sentiment index is to observe figures greater than +2 or less than -2 in which the trend is also runs in agreement of the contrarian element of the indicator. In other words we are shorting the market in a down trend when sentiment is for the buy.
The speculative sentiment indicator is a leading co