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Euro Puts our Trading Strategy to a Real Test

Euro Puts our Trading Strategy to a Real Test

David Rodriguez, Head of Product

Why and how do we use the SSI in trading? View our video and download the free indicator here

EURUSD – The Euro is once again attempting to break out of its year-long trading range, and our data shows retail FX traders are selling aggressively into EUR/USD gains. Total short interest has surged 40 percent since last week, and indeed over 70 percent of all open retail trader positions are currently short.

We most often treat such one-sided sentiment as a contrarian indicator to price action—if everyone is short we look to go long. Our data shows retail traders close the majority of their trades out at gains, but the size of losses is historically far larger. Past performance is not indicative of future results, but in practice this means that our contrarian trading strategy can be expected to lose more often than it gains. That has been exactly the case as noted last week—retail traders tend to do well in slow-moving, range-bound market conditions.

This is relevant for the simple reason that we’ve seen retail traders sell EUR/USD ahead of key reversals for some time now, and it is entirely possible that current selling favors another reversal lower. Ultimately we believe going against the crowd is the winning strategy, but the risk that retail traders have it ‘right’ and the EUR/USD will reverse is quite high.

See next currency section: GBPUSD - British Pound May Stick to Tight Range

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