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91% of Traders Short NZDUSD : How to Trade NZDUSD using Sentiment

91% of Traders Short NZDUSD : How to Trade NZDUSD using Sentiment

DailyFX, Research


As US Congressional leaders debate the next step towards the US debt ceiling, the USD has been selling off and losing value. 91% of the FXCM retail traders have been using the recent weakness to begin buying US dollars versus the Kiwi (New Zealand Dollar). With the NZDUSD trading at multi-decade highs, we have a good chance at a good risk to reward ratio by following the trend and buying the NZDUSD pair.

As of July 28, 2011 11:35 GMT

The recent data on FXCM’s proprietary SSI positioning reveals 10 out of 11 FXCM retail traders are short the NZDUSD. Many times, the retail traders try to pick tops and bottoms against strong trends and they typically end up with losing trades. The NZDUSD exchange rate is trading at new highs not seen since it began free floating. Therefore, the trend is strongly pointing to the upside.

When there are a significant amount of traders positioned against the direction of a strong trend, we have a sentiment extreme set up. Now, we simply look for a technical reason to enter the NZDUSD in the direction of the prevailing trend (up).

(Created using FXCM’s Marketscope 2.0 charts)

The market thinks the black price channel is important because prices have been confined within this channel for the past 10 days. Prices are near the bottom of this upward sloping channel giving us our first technical reason to enter the trade long. Additionally, the MACD line is poised to cross the signal line adding a level of confirmation to the trade.

Enter the trade at current market levels with a stop just below the recent swing low near .8675.

We will look for twice the distance as our take profit level. Current stop loss is 46 pips away, so look for a take profit level of at least 100 pips or at .8820. This gives us a 1 : 2 risk to reward ratio.

Risk no more than 5% of your account balance on all open trades.

Additional educational resources

How to Trade with Support and Resistance Part 1

Trading Support and Resistance in Forex Part 2

Trading with MACD

Determining Risk to Reward Ratios

Learn how to identify trade set ups based on SSI in real time with live webinars. Inside DailyFX Plus we offer 2 weekly webinars devoted strictly to SSI while several other webinars reference it in the trading opportunities (your live account username and password is required to get into DailyFX Plus). Our instructors will share with you key levels of support and resistance and how to identify trading opportunities based on SSI signals.

Jeremy Wagner contributes to the Instructor Trading Tips articles.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.