Forex Sentiment & Volume Analysis - GBPUSD
- GBPUSD has been in a very strong downtrend
- Falling prices coincide with above average volume
- GBPUSD SSI is at +1.5, traditionally bearish signal
Since last summer, the British Pound has been in a free fall against the United States Dollar. For those following the pair, you know that its price currently rests at multi-year lows. This has spurred many traders to look into buying the GBP “cheap” and then waiting for it to rebound before taking profit.
However, after analyzing this pair using retail sentiment and trading volume, I am not convinced that now is the best time to buy the GBPUSD. Today, we will look at these two tools in reference to the GBPUSD to give us an idea on where this pair could be headed 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.
GBP/USD Falling On Above Average Volume - Bearish
With the recent addition of the Real Volume indicator on the Trading Station Desktop, I’ve been watching volume during trends to find confirmation. It is a very simple tool to use. All we need to see is an increase in the volume traded during a trend to confirm the trend’s strength, and a decrease in volume during counter trend moves.
I’ve applied Real Volume (with a 20 period Moving Average) to the GBPUSD Daily chart below and highlighted the most interesting areas of the charts. The red highlighted areas show us periods of time when real volume was above average. It’s during high volume that we want to look at the overall direction of price.
Learn Forex: GBP/USD Price Decreasing During Above Average Volume
(Created using Marketscope 2.0 charts)
When moves occur on high volume that tells us there is a good amount of momentum behind the move, as there was more participation to make that move happen. So the fact that higher than average volumes occurred during the last two major down moves tells us that this downtrend is very strong and could likely continue into the future.
It is also nice to see that during the latest counter trend move (that occurred in the white area of the chart) coincided with below average volume. There was not as much activity during this pullback which is a sign of weakness.
GBPUSD SSI is Positive - Bearish
The Speculative Sentiment Index or SSI is a tool we use to gauge how many retail FXCM traders are currently long and short each major currency pair. The idea is that most retail traders lose money, so if can look at the overall position of this group of traders, we might be able to generate a trading edge by taking the opposite position of this retail group. In my opinion, this is best viewed in chart form.
For members of DailyFXPlus.com, we can see SSI updated two times a day. The chart below displays the SSI for GBP/USD as it compares to the GBP/USD’s actual price.
Learn Forex: GBP/USD SSI Contrary to Price Moves
(Screen capture from DailyFXPlus.com)
We can see the inverse relationship between SSI and price almost immediately. When SSI is a negative number, price tends to rise and vice versa. Not all SSI/Price charts are this clear cut, but this chart shows the potential of using SSI as a directional filter.
With the GBPUSD SSI reading at +1.5, I am more interested in selling at this time.
Real Volume and Sentiment plays a huge role in my trading, and I think the GBPUSD currently is a good example of what I look for in an opportunity. Feel free to utilize a demo account to practice trading risk-free before trading with real money and perform your own due diligence.
---Written by Rob Pasche
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