HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING USING IG CLIENT SENTIMENT: ADVANCED GUIDE HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team Contents How to Use IG Client Sentiment in Your Trading ........................................................................... 3 What is IG Client Sentiment? ....................................................................................................... 4 How to Analyze IG Client Sentiment ............................................................................................. 6 Trading with IG Client Sentiment ................................................................................................10 Disclaimer..................................................................................................................................12 www.dailyfx.com 2 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team How to Use IG Client Sentiment in Your Trading Welcome to our trading guide on IG Client Sentiment (IGCS) – a unique tool used for gauging retail positioning and sentiment across FX, commodity, and equity markets. Traders take various approaches to analysis whether it be with a focus on fundamentals, technicals or a combination of the two. It is also common for traders to develop a comprehensive strategy that combines several analytical tools into a cohesive framework. Analyzing market sentiment is one example of the many tools utilized by traders to improve their decision-making process. We can turn to IG Client Sentiment data, which can be accessed in real-time on our DailyFX.com sentiment hub, for an unparalleled view of trader positioning and sentiment. www.dailyfx.com 3 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team What is IG Client Sentiment? IG Client Sentiment is a summary of the latest retail client positioning data from IG Group - the world’s largest CFD (contract for differences) provider1. This global footprint delivers a robust sample size for IGCS readings that are, in general, reflective of the market as a whole. IG Client Sentiment data is listed for key markets like EUR/USD, crude oil, the Dow Jones and Bitcoin among many other popular markets. 1 According to IG Group annual report published August 2020. www.dailyfx.com 4 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team Similar to the Commitment of Traders report, which details positioning of futures traders, or the PutCall Ratio, which reflects positioning of options traders, IG Client Sentiment also gives insight on market positioning, but from the perspective of retail traders. This segmentation helps IGCS readings stand out relative to other market positioning reports. Further, seeing that IG Client Sentiment data can be retrieved for free in real time, it has a superior ease of access. We typically look at IG Client Sentiment through the lens of a contrarian considering the data is concentrated on retail trader positioning. IGCS functions as a contrarian indicator because retail traders, generally speaking, attempt to call market tops and bottoms (i.e. reversals) in lieu of following the direction of a prevailing trend among other frequently-discussed poor trading habits common among novices. As such, retail traders tend to be on the losing side of a position more often than not2. 2 According to IG Group public disclosures, 76% of active non-discretionary trading accounts were unprofitable for the calendar quarter ending September 2020. Past performance is not necessarily indicative of future results. www.dailyfx.com 5 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team How to Analyze IG Client Sentiment There are two key components of IG Client Sentiment. First and foremost is the percentage of traders net-long and net-short for a given market. These figures provide a high-level view of sentiment and underlying bullish or bearish bias. This component also helps determine the degree of market concentration and, in turn, can be used to decipher the robustness of IGCS readings. IGCS contrarian trading signals are typically stronger and more reliable when the percentage of traders net-long and net-short are at extremes (i.e. trader positioning is skewed heavily to one side of the market). The example of IGCS data below is a summary table that illustrates whether the majority of retail traders are net-long or net-short for a given market. www.dailyfx.com 6 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team At the top end of the spectrum, we see the most extreme net-long markets while the most net-short ones are shown at the bottom. Each horizontal bar is a segmented scale that adds up to 100%. The blue portion reflects the percentage of traders net-long while red reflects those net-short. These depict how crowded retail trader positioning is. The greater the percentage of traders net-long alludes to an increasingly stretched bullish bias held by retail market participants. Conversely, the greater the proportion of net-short positioning points to a relatively more concentrated bearish bias. That said, it is important to remember that we analyze IGCS from a contrarian’s perspective. This is why the trading signal for a given market is often bearish when the majority of traders are netlong. Conversely, when the majority of traders are net-short, the IGCS contrarian trading signal tends to be bullish. This is not always the case, however, as there are some exceptions to the general rule www.dailyfx.com 7 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team of thumb. The secondary component of IG Client Sentiment is the percentage change in longs, shorts, and open interest over a specified time frame. A summary table of changes in trader positioning is provided as an example above. Big swings in trader positioning, as highlighted by the underlying changes in net-long and net-short positions, can warrant a closer look at the respective market. For example, if the majority of traders have been netlong but there was a notable decrease in the number of traders net-long, this could hint at the potential for a reversal in price trend. Also, analyzing these more-detailed measurements of changes in positioning can supplement the overarching IGCS contrarian trading signal by either bolstering or discounting it. This is why combining the readings of net-long versus net-short positioning with the changes in trader positioning can sometimes lead to conflicting or mixed IG Client Sentiment signals. www.dailyfx.com 8 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team These primary components of IGCS are combined into an easy-to-read dashboard with an example seen in the image shown above. The ‘symbol’ column lists the asset. The ‘signal’ column is the directional trading bias based on the underlying sentiment data. The ‘net-long’ and ‘net-short’ section highlights the proportion of traders that are bullish or bearish in a given market. The portion detailing the ‘percentage change in longs, shorts, and open interest (OI)’ reflects the shift in trader sentiment over a specified time period - either daily or weekly. Specifically, the illustration above provides an example of IG Client Sentiment data on gold. According to the data, 83% of retail CFD traders were long gold. Simultaneously, there was a -23% reduction in short positioning compared to a week prior. Considering we generally take a contrarian view to crowd sentiment, the sharp decrease in shorts (i.e. crowd sentiment turned relatively more bullish) led our IGCS contrarian indicator provided a signal to look for potential bearish trading opportunities. www.dailyfx.com 9 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team Trading with IG Client Sentiment Once again, the key to using IG Client sentiment is keeping in mind that we use the data as a contrarian indicator to price action. The nature of a contrarian is echoed by the infamous quote by Warren Buffett, “be fearful when others are greedy and be greedy when others are fearful.” In other words, a contrarian is someone who places a trade in the opposite direction of the crowd. This means that a contrarian would look for bullish trading opportunities when market positioning reflects a broadly bearish bias, and vice-versa. One of the reasons we view IGCS as a contrarian indicator is because retail traders tend to fade momentum (i.e. selling in an upward-trending market or buying into a downward-trending market). Looking at a direct overlay of IG Client Sentiment on a price chart helps illustrate this. www.dailyfx.com 10 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team The example above is of spot GBP/USD overlaid with IG Client Sentiment spanning from 01 January 2020 to 21 December 2020. The price scale is pinned to the left axis while the right axis measures the percentage of traders net-long. The lower portion of the image reflects the aggregate changes in the number of traders net-long and those net-short. We can visually see how crowd sentiment tends to inversely track price action, which underscores our contrarian approach to analyzing IGCS data. In fact, if we hone in on spot GBP/USD price action between July 2020 and December 2020, we can see that the currency pair climbed over 1,000-pips from the 1.2500-level into the 1.3500-handle. Yet, in spite of the bullish trend, IG Client Sentiment data showed that the majority of traders turned netshort and generally maintained their bearish bias. Lastly, we must note that sentiment indicators are not timing indicators. In the final example above, IGCS showed that retail CFD traders were largely short GBP/USD. But, this does not necessarily mean that we should simply go long. Instead, we can interpret the IGCS reading as a directional bias - i.e. the indicator suggests whether one should look for opportunities that align to a market that is rising or falling. To summarize, IG Client Sentiment data can provide unique insight into trader positioning and emotion. IGCS readings are viewed as contrarian indicators to price action and it is why the trading signal is often directionally biased against the crowd. Incorporating the analysis of this tool might help traders supplement their comprehensive strategy by serving as an important component of a broader framework. www.dailyfx.com 11 HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING DailyFX Research Team Disclaimer DailyFX Market Opinions Any opinions, news, research, analyses, prices, or other information contained in this report is provided as general market commentary, and does not constitute investment advice. DailyFX will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. 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It is the responsibility of visitors to this website to ascertain the terms of and comply with any local law or regulation to which they are subject. High Risk Investment Trading in financial markets, foreign exchange, indices and commodities on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade in financial markets, foreign exchange, indices and commodities, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain losses in excess of your initial investment. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. www.dailyfx.com 12
