How important something like retail sentiment is for swing trading and whether there are any sites that we would recommend using for it. Now there’s been a lot of debate about the usefulness of retail sentiment and whether it should be used as part of your analysis or not. And the most common idea around is that retail traders are normally wrong when it comes to strong trending moves. Well, I’d say the majority of them are usually wrong. So, the idea is that as long as you are trading against the retail crowd, retail sentiment, you should actually be trading in the right direction alongside the institutional traders.
So retail sentiment is basically used as a contrarian indicator if you will. So if the majority of the retail community, is long on the Euro, for example, then that would be essentially a signal to be short on the Euro in line with that contrarian view. Now, a popular belief of why retail sentiment is such a good contrarian indicator is built upon the idea that retail traders are always going to cut the winners short, and let the losers run. So they’re always trying to make a quick buck. So they’re always trying to buy the low and sell the high, or trying to sell the tops and buy the bottoms in strong trending moves. And hoping to catch that reversal. Now, when it comes to my own analysis, to be honest, I can say that using retail traders’ sentiment as an indicator for where I should trade or not, doesn’t really form any part of my analysis tool belt. I think if monitoring position is something that you’re interested in, it would probably be rather, or better, to look at something like COT positioning.
So looking at the COT positioning for non-commercial, so institutional positioning, these are the players that, you know, that can really move the market. And when these guys increase positions or unwind their positions in trending markets, then that’s where the biggest moves will be seen. But even then, you know, that being said, COT, as part of my analysis, is probably the lowest on my list in terms of importance. When it comes to analyzing the markets, it’s a very useful tool to see where institutional traders have their positions lined up or where the net positioning in the market is. You know, but I generally just use it as a general guide and not really use it as a trigger to take any trades, if that makes sense. So, that isn’t to say that retail sentiment isn’t useful, and I’m sure there are lots of traders out there that use it successfully and that can swear by it. You know, one of the challenges though, that I ran into a couple of years back and also looked into retail sentiment, is that usually, you know, if you’re going to look at a particular broker, these sentiment indexes are released by a particular broker for their particular order book.
So to have any real meaningful value in terms of the overall market, you’ll probably need to want to look at, you know, many retail traders or many retail brokers retail sentiment. And so you’ll need to go to multiple brokers instead of just looking at one broker, to get a more accurate view of where the market is truly positioned. And even then, you know, it’s probably going to be messy because you’re only going to have a couple of brokers lined up, that provide that type of data. And I mean, if you take the amount of time that it will take you to go through a couple of broker sites every day to try and look at the retail sentiment. You know, I would argue that the return on your time investment will probably not be that great, to be honest.