Wednesday, March 16 will long be remembered by forex traders. After the devastating earthquake and tsunami struck Japan there was a record-high hike in the Japanese yen against the US dollar. The greenback dropped to 76.25 yen unexpectedly, catching most currency traders by surprise—but not the ones who were monitoring the forex market movements in 3D, making Speculative Sentiment Index (SSI) another key dimension in looking at price actions.
The SSI is a unique tool for currency traders, provided by FXCM Inc.(NYSE: FXCM), that reveals where the forex trading crowd are positioned, whether they are buying or selling, and where they are exiting or entering. The SSI is not just the shadow of price movements in the past, which is essentially used in technical analysis, but it’s a real trading book showing what other traders are doing at present. This information can help forex traders get a sense of the market sentiment, providing transparency in a mostly opaque forex market. FXCM has the largest cross-sections of forex traders around the world and, therefore, has a credible amount of client data from which to draw the SSI.*
*As of February 2011, FXCM’s total retail trading volume was 250 billion.
The Story of Yen Traders, Before and After the Disaster
The trading book’s chapter of March 2011 reveals the third dimension of the volatile yen trading during the Japan disaster.
US Dollar/Japanese Yen Pair Shows Traders have Remained Net-Long Since June, 2010
“While the market moves were certainly more dramatic than we expected, the SSI had been pointing to a strong yen rally for the whole week up to that point,” says John Kicklighter, currency strategist at DailyFX, the free news and research website of FXCM Inc. “On the Monday following the tragic earthquake in Japan, we saw traders sell off the yen across the board. I think that they saw the price approaching the all-time low for the pair and thought, ‘It won’t go that far, here’s my chance to sell yen at a great price.’ So we saw the USD/JPY SSI skyrocket from under four on Monday morning to well over 9 by Wednesday afternoon EST.” An SSI reading of nine means that there are nine accounts long a currency pair for every one account that is short.
As the SSI screen tells the story, FXCM traders saw the all time low for USD/JPY to be 79.75, so their stops were all below the 79.75 level. Once USD/JPY broke that level, especially in the thin markets around 5 pm in New York, all those stops got tripped, and a huge wave of selling hit the market, as traders got out the their USD/JPY longs. That is where the SSI saw the spike.
Now, a week later, the USD/JPY is just below 81 again and the SSI is back at a more normal 3.67. Kicklighter adds, “The fact that the SSI has stayed at this more normal level for a week now tells me that the USD/JPY has found a floor for the time being.”
How to Use the SSI
During trending market conditions, the majority of forex traders sell into rallies (when the prices go up) and buy into declines. The historical data at FXCM Inc. shows most successful traders are actually the ones who move against the direction of the majority of forex traders and use the SSI as a contrarian indicator. FXCM’s innovative SSI is a gauge for the market sentiment, giving the forex trader ideas about what to trade by analyzing what the trading crowd is doing. This gives the trader an opportunity to go against the majority during the aggressive shifts in sentiment and increase their chances for profit.
DailyFX, the free news and research website of the leading forex and CFD broker, FXCM, delivers up-to-date analysis of the fundamental and technical influences driving the currency and commodity markets. With eight internationally-based analysts publishing over thirty articles and producing five video-news updates daily, DailyFX offers in-depth coverage of price action, predictions of likely market moves, and exhaustive interpretations of salient economic and political developments.
DailyFX is also home to an extensive economic calendar with breaking economic news and reports from around the world, complete with advanced sorting capabilities, detailed descriptions of upcoming events on the economic docket, and projections of how economic report data will impact the markets. Combined with free charts and live rate updates featured on DailyFX, the DailyFX economic calendar is an invaluable resource for traders who rely heavily on the news for their trading strategies. Additionally, DailyFX serves as a portal to a vibrant online discussion forum in the forex trading community. Avoiding market noise and the irrelevant personal commentary that plague many forex blogs and forums, the DailyFX Forum has established a reputation as being a place where real traders go to talk seriously about trading.
FXCM Inc. (NYSE: FXCM) is a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers worldwide.
At the heart of FXCM's client offering is No Dealing Desk forex trading. Clients benefit from FXCM’s large network of forex liquidity providers enabling FXCM to offer competitive spreads on major currency pairs. Clients have the advantage of mobile trading, one-click order execution, and trading from real-time charts. FXCM's UK subsidiary, Forex Capital Markets Limited, also offers CFD products with no re-quote trading and allows clients to trade forex, oil, gold, silver, and stock indices on one platform. In addition, FXCM offers educational courses on forex trading and provides free news and market research through DailyFX.com.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. DailyFX has taken reasonable measures to ensure the accuracy of the content herein, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content and your use of the charting indicator and EAs herein. In addition, the content herein, including but not limited to the charting indicators and EAs, is provided as general market commentary, and does not constitute investment advice.
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