Talking Points
- SSI is a proprietary tool at FXCM, derived to interpret market positioning.
- Traders can use sentiment extremes to identify strong trends.
- An extreme EURUSD SSI reading may lead to continued trend based entries.
SSI (Speculative Sentiment Index) is a proprietary tool offered to FXCM clients through DailyFX PLUS. Sentiment in Forex can act like a compass used to navigate the market. Once mastered, traders will have the ability to add SSI as a component to any existing trend based strategy. Today we will work to get familiar with this resource, while looking at its potential uses.
First, SSI is a calculated ratio that gives us a snapshot of trader positioning while giving hints on market direction. SSI reveals trader positioning by determining if they are net long or short a currency pair, and if so by how much. Below we can see SSI as displayed through DailyFX Plus. If the SSI reading is a positive number, it means more
So now that we know how to read SSI, let’s discuss how these numbers can be used in our trading.
Trading SSI
As of this morning, we can see that SSI for the EURUSD reaching an extreme level of -4.37. This ratio indicates that traders are vastly net short the Euro relative to the USD at a rate of over 4 to 1. So how can active traders use this information and why is this information important?
SSI is an important Forex tool, because it is based around the psychology of traders. Traditionally most Forex traders look to trade tops and bottoms. Normally this stems from traders looking to take advantage of a “buy low, sell high” mentality. While there is nothing wrong with this thinking, it does often cause the majority of traders to end up fading some of the markets biggest trends! Because of this, SSI is often considered a contrarian indicator. Savvy traders that review SSI can then proceed to look for busy signals when SSI is net long or buy when SSI net short for a specific currency pair. Let’s take a look at an example of SSI at work.
Learn Forex – Current EURUSD SSI & Price
SSI and the EURUSD
Below we can see an example of SSI relative to the price of the EURUSD. Going back to the start of September, SSI has indicated that net short positioning has continued to increase. When compared to the price graph, we can see that as more traders have sold the EURUSD price has actually risen to the tune of over 600 pips for the same period! The current reading of SSI continues to stand at an extreme reading of -4.33. As more traders continue to sell into this market uptrend, SSI data suggests that next week’s trading could bring further advances of the EURUSD. If prices do continue to surge towards higher highs, we should take SSI as a signal to continue the trend based strategy of our choosing.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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