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66% of EURUSD Retail Traders Are Buying, What This Means For You

66% of EURUSD Retail Traders Are Buying, What This Means For You

2014-08-05 19:00:00
Rob Pasche, Forex Trading Instructor
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Talking Points:

  • EURUSD SSI (retail sentiment) has broken above +2.00
  • SSI can have an inverse relationship with price
  • Euro sellers have many support levels to watch

After the 40 pip rally last Friday, the EURUSD has fallen to multi-month lows today. Many retail traders have taken this opportunity to buy “cheap” Euros, expecting the EURUSD to make a low and then bounce higher; but traders that follow sentiment likely have a different idea. Today we take a look at the most popular currency pair and develop a trading plan using sentiment and support and resistance.

66% of EURUSD Traders are Buying

When 2/3rds of a trading group are buying a particular pair, it translates to an SSI value of +2.00. In other words, we have 2 buyers for every 1 seller, a 2:1 ratio. +2.00 is the current SSI value for the EURUSD as traders load up on buy positions, but what does this mean for us?

Historically, sentiment and price tend to have an inverse relationship with each other. During times when SSI is a positive value, we often see price fall; when SSI is a negative value, we often see price rise. This is one the basic principles of How to Use the SSI, my favorite trading tool.

The chart below shows the last 10 weeks of EURUSD’s price and SSI ratio. We can see that price rose during periods of negative sentiment and fell during periods of positive sentiment. When SSI was neutral, price trekked sideways

Learn Forex: EURUSD’s Price and SSI Relationship

66% of EURUSD Retail Traders Are Buying, What This Means For You

(Created using real-time SSI, available through DailyFX On-Demand)

Purely looking at sentiment, I have a sell bias towards the EURUSD.

EURUSD Breaking Significant Lows

To go along with our sentiment-based bias, we are also witnessing the EURUSD fall to near 9-month lows. The medium-long term perspective sees the Euro in a current down trend. Following the old adage “the trend is your friend,” it would make sense for trend traders to look to short the EURUSD pair. So this means both sentiment and trend are confluent to selling the EURUSD.

But just because we have two valid reasons to sell the EURUSD, doesn’t mean it will be an easy trade. There are a few support levels that could get in the way of a major move to the downside.

Learn Forex: EURUSD Breaking to 9-Month Lows with Various Support Levels

66% of EURUSD Retail Traders Are Buying, What This Means For You

(Created using FXCM’s Marketscope 2.0 Charting Package)

The chart above combines psychological price levels (levels ending in “000”) as well as Fibonacci Expansion levels. We should expect to see price struggle to break below 1.3300, 1.3209, 1.3100, and 1.2906. It might be wise to take partial profits when price is able to reach these levels, as the EURUSD could bounce off of any of them.

Once we decide on our profit targets using these levels, we can then set our stop losses to give us a positive risk:reward ratio.

Sentiment Spurring Shorts

We don’t know what’s going to happen in the future, but it’s a trader’s job to notice patterns and discover non-random occurrences in a seemingly random market. Using sentiment as a guide can assist in that as well as locating strong trends. To trade the EURUSD risk-free, download a Free Forex Demo account today.

Good trading!

---Written by Rob Pasche

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