First of all, this approach to trading sentiment is entirely based on one simple fact:
“the crowd is usually wrong”
Because of this one simple harsh reality, we should open our trades in the direction opposite to the crowd’s direction.
The key here is the word "direction" ... it is not necessarily whether X is a buy / sell as it stands at this precise point in time and space, but we must ask ourselves: "is X more of a buy? Or is X more of a sell, over time?"
Does this movement over time agree with the high level? If so, that's an awesome signal to look for entry possibilities.
Let us imagine that GBP is neither a buy or sell and that this ratio is 50/50 or 50% - retail investors are completely undecided essentially.
Over time, we will see a subtle shifting on the sentiment, likely to be caused by news or a data release, perhaps some Central Bank commentary etc. But rest assured the "herd" / uninformed "dumb" money love to speculate the direction and future of a currency.
Sentimental shifting across time: a hypothetical example
Now let us imagine some time has passed and some major Brexit news occurs. This will cause retail guys and girls (the small and very ignorant speculators) to enter long / short positions on GBP, solely based on this "news".
Let's say for argument's sake it was bad news, perhaps overnight there was a coup on Number 10 Downing Street and Theresa May got ejected from power. Or something you'd consider to be "bad news".
We have to consider these two fundamental things:
Was GBP already a buy or sell? (this is absolutely vital to understand) Is the movement of dumb money confirming this bias?
In this (hypothetical) case GBP was already a huge buy, prior to the bad news, since 22% of retail investors were bullish, and the majority (this 78%) were heavily committed (financially) for it to fall.
This "bad news" will cause the dumb bears to increase their bearish bets and exacerbate the situation
So GBP will very, very likely shift towards being a "buy". And a classic yet harsh stop hunt will occur as a result.
This explains why trading news is a terrible idea. As you must understand whether the currency was a buy or sell in the first place.
They love to punish you for having crap risk management, if you've not realised that already consider this article going forward.
A lot of you aren't aware whether GBP is a buy or if USD is a sell, or whatever. It's actually frankly scary seeing tweets that are completely devoid of sentiment analysis. As you sell into uptrends and buy into downtrends. You're just looking at levels on your chart and using the same indicators and fibs that are not confirming the big picture.
So a question to ask yourself:
Why would banks allow GBP to rise if there was "bad news" for the GBP? Surely it should fall, right? Why the hell would it go UP?
Because they SEE how you are positioned, and because they SEE you're all bearish, they push price up as (sensibly) to do the opposite of you - the majority of dumb money, since the majority of you are actually totally blind to what's actually going on and have crazily wide stops that are asking to be hunted down.
People often say the market's rigged. It's not, it's these people who don't realise they're being screwed largely part to their bad risk management and sheer ignorance of the retail long / short ratio.
Think about it for a moment. If you were a bank and had to choose to prey on a fat cash cow, or a skinny fox, which animal would you spend your time and energy preying on?
The cow keeps trundling along, unaware it's lowly position in the food chain, and that its purpose in life is to become prey and be preyed upon.
So, please ... don't let that cow be you... Watch this % ratio on everything in the financial markets. As long as there's a bid and ask price on anything, you can bet your cotton socks they'll be a majority of "popular opinion" and that majority will be hunted down.
If you're trading for a living purely looking at lines on a chart and ignoring the big picture you run the risk of being majorly screwed over forever, until game over time...
Since, if you think about it - nearly everyone is looking at the same trend lines, using the same indicators, believing media events and selling and buying into "news". All you're doing is being herded up for target practice. It's like shooting fish in a barrel... you're making it TOO easy to be prey.
Hopefully after this article, things will be a little bit clearer. I'll keep doing this bubble charts on twitter as they're scarily accurate.
I hope it made sense. Just remember to ask yourself:
is "X" a buy or a sell? (you know this by looking at current ratios) (high level analysis)is "X" more of a buy or more of a sell? (you know this by looking at the % difference changing over time) (low level analysis)
Let me know if not and I'll adjust it. Also please monitor the current ratios...