Can You Use Forex Broker Client Position Reports as a Tool for Trading?
At first glance forex broker client sentiment reports showing net client positions seem like a useful tool.
However, when you dig deeper it raises the question whether the data should be taken at face value.
While retail is only a small part of the wider forex trading market, the question is whether client position reports are indicative of the general market.
In this regard, I noticed that when a currency moves up the majority of net positions tend to be short and when it moves down the majority of positions tend to be long.
Example: When the EURUSD was making a run at 1.12, one broker showed net client positions at 71% short. Considering EURUSD is currently trading at 1.0940, those short, if taken near the highs, would look ike geniuses. However, more likely the report indicated those hanging on to losing positions from lower level in the hope EURUSD would reverse.
Does this suggest retail traders are always on the losing side of the market or is there more to it?
Statistics show the majority of retail traders lose money. are the forex brokers to blame? There are reasons for this that go beyond just fading every move but that is for another discussion.
The focus of this article is whether client sentiment reports are a good indicator and a useful tool.
Think about it.
There is certainly a segment of retail traders who trade without stops and hold on to losing positions in the hope that a market will come back to them.
On the other hand, those on the right side will be taking profits along the way, thus reducing that side of net client positions.
So, while those trading on the right side will be taking profits those hanging on to losers will stay constant until margined out. Of course, there are also those trading with a trend and those trading against it and/or adding to positions but I am more interested in the core underwater positions.
Let me explain.
If my view is correct, while forex broker reports reflect net positions, they do not necessarily indicate retail client sentiment.
It may just show those trading on hope and sitting with losers, thus skewing actual client sentiment.
Bottom line is that forex broker net position reports may not be a true indicator of client sentiment and should be viewed with a grain of salt.
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