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Forex Sentiment & Volume Analysis - EURUSD

Forex Sentiment & Volume Analysis - EURUSD

2015-04-18 03:00:00
Rob Pasche, Forex Trading Instructor
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Talking Points:

  • EURUSD has had a very bullish week
  • Latest rally accompanied by above average volume
  • EURUSD SSI is at -1.73

This week, the Euro reclaimed some ground against the US Dollar. From its low on Monday to the high today, it rallied over 300 pips. Unfortunately, it did not break any significant levels, but by looking at real volume and sentiment levels this past week, EURUSD is showing signs that it could rally even further.

This article will look at the EURUSD with respect to volume and sentiment to give us an idea of where this pair might end up in the future.

Retail Sentiment is acquired using DailyFX Plus’ Speculative Sentiment Index. It is free for real FXCM account holders, but is also free for anyone using a two week trial: DailyFX Plus Trial

Retail Volume is available on FXCM’s Trading Station Desktop platform. This free software can be downloaded here and a free demo login can be acquired here. Real Volume is a default indicator that can be added to your charts.

Bullish Week for EURUSD With Large Volume - Bullish

One of the basic principals in analyzing trading volume is wanting to take note of what direction price is moving when volume is at its largest and what direction price is moving when volume is at its smallest.

When volume is higher than average, the direction of price during that time is the direction a volume trader would favor. Any price moves on weak volume is typically faded by a volume trader. This is true in confirming trends, confirming breakouts and identifying reversals.

While the EURUSD has been mainly moving sideways the past month, we have seen a couple price rallies and pullbacks. The chart below highlights the last two price rallies and the real volume traded during that time. We can see that when price was increasing, volume was typically above average (and when price was moving sideways or moving lower, volume was typically below average).

Learn Forex: EUR/USD Price Moves Higher on Above Average Volume

Forex Sentiment & Volume Analysis - EURUSD

(Created using Marketscope 2.0 charts)

Volume for the EURUSD paints a bullish picture since it was above average during the last two rallies, but it is not the only reason why traders might look to buy this pair.

EUR/USD SSI Remains Negative at -1.73 - Bullish

The Speculative Sentiment Index or SSI is a contrarian tool where we look to take trades that are opposite of its reading. So during times when SSI is positive, we would look for sell trades and when SSI is negative, we would look for buy trades.

The chart below shows both EURUSD's price and EURUSD's SSI reading for the past two years. We can see the inverse relationship between SSI and price. Most times when SSI is negative (red), price moves higher and when SSI is positive (green), price moves lower. It's this relationship that gives sentiment traders their rationale for trading opposite of the majority of retail traders.

Learn Forex: EUR/USD SSI Negative as Price Rises Off Lows

Forex Sentiment & Volume Analysis - EURUSD

(Screen capture from DailyFXPlus.com)

EURUSD SSI has been negative for almost all of 2015. Even though price has mainly fallen this year, I still have a long bias based on SSI. If we see a break of a major high in the next couple weeks, it could move the EURUSD soaring.

In Conclusion

Both Real Volume and Retail Sentiment are tools that can be used as direction filters. Since both of these tools are giving us a long bias on the EURUSD, that is the direction in which I am looking to make trades. But remember, there are no guarantees in trading. Perform your own due diligence and trade using sound money management. Also, feel free to utilize a demo account to practice trading risk-free before trading with real money if you are just starting out.

Good trading!

---Written by Rob Pasche

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