The Importance Of Retail Sentiment Analysis In Forex Trading
The Importance of Retail SentimentAnalysis in Forex TradingoandaMT4.comForex Indices Commodities Precious Metals Bonds
The Importance of Retail Sentiment Analysisin Forex TradingWhile retail trading isn’t a new concept, until the turn of the century many investors were moreinterested in stocks, particularly Internet stocks, believing they offered a fast return. However, whenthe dot com bubble burst, these traders began to look further afield, often turning their attention tothe currency markets, which could be easily accessed thanks to brokers such as OANDA.However, leveraged trading in forex also comes with inherent risk, due in large to the factthat rapid market shifts can result in losses that may outweigh initial investments, and manyinexperienced investors struggle to deliver consistent profits as a result. Compared with moreexperienced traders who focus on long-term gain, these traders often demonstrate bad habitsthat can impair their trading strategy, contributing to losses. In particular, we often see the followingbad habits demonstrated by traders:Many retail traders want high win rates, but fail to ride winning trades or cut their lossesAs the chart below illustrates, retail traders typically develop a strong sense for entries and arecapable of achieving win rates consistently above 50 percent, however they don’t let their winningpositions ride.100Percent75Winning trades50Losing SD/CHFUSD/JPY0Percentage of all trades closed out at a gain and loss per currency pairData source: Derived from data from a major FX broker * across 15 most traded currency pairs3/1/2014 to 31/3/20152oandaMT4.comThe charts featured in this manual are for illustration purposes only
The Importance of Retail Sentiment Analysisin Forex TradingIn general, many retail traders experience a higher average loss than win per trade, whichmeans despite having a high hit rate, they typically hold on to losses in the hope the marketwill turn rather than cutting their losses before they get any larger. This becomes evident whenobserving current open positions in relation to the current market price.The majority of clients havebeen buying into the declineand are holding on insteadof cutting their lossesA small numberof clients areattempting toshort, but maybe too lateOANDA’s MT4 Open Order Indicator: Current open positions on GBP/USDBy switching from net open positions to non-cumulative open positions on OANDA’s MT4Open Order Indicator, you could learn from savvy traders who have not cut their profits short,holding on to winning GBP/USD positions instead.Smart traders are on the rightside of the market, and youcan learn from their strategyOANDA’s MT4 Open Order Indicator: Long and short open positions3oandaMT4.comThe charts featured in this manual are for illustration purposes only
The Importance of Retail Sentiment Analysisin Forex TradingMany traders try to pick winners instead of trading trendsMany retail traders continue to try to pick winners, focusing on selecting tops and bottomsrather than riding trends. This practice can work as long as prices remain within a certain range,but as soon as the range breaks, retail traders end up selling into rising prices. OANDA offerstwo tools that illustrate this tendency.Free to everyone, OANDA’s Historical Position Ratio demonstrates how long-short positionsheld by OANDA’s clients have evolved over time across a wide range of pairs. Drawn fromOANDA’s tool, the example below demonstrates how traders continue to reduce their longpositions – increasing their short positions – as the price of AUD/USD rises.Retail traders are reducing longs and flippingnet-short as the price breaks 87.00 to the upsideRetail traders are reducing shorts and flipping netlongs as the price breaks 87.00 to the downsideOANDA’s Historical Position Ratios: AUD/JPY over one monthThis chart demonstrates how retail traders tend to fade rallies. The AUD/USD has been risingsteadily over the past five trading days, yet on the whole OANDA’s clients have been sellinginto the rally.Available to clients only, OANDA’s proprietary MT4 Open Order Indicator also demonstratesaggregate trends. The example below shows how many clients have been buying into therecent GBP/USD decline, because the position ratio highlighted in the top left-hand cornershows that almost 70 percent of clients are long.Some traders are sustaining lossesdue to the EUR/AUD decline ratherthan following the trendOANDA’s MT4 Open Order Indicator: Net open positions4oandaMT4.comThe charts featured in this manual are for illustration purposes only
The Importance of Retail Sentiment Analysisin Forex TradingWhile this habit is common, not all retail traders fall foul of this, and by switching from netopen positions to non-cumulative open positions on OANDA’s MT4 Open Order Indicator, it’spossible to gain insights from smart traders who have been selling GBP/USD nearly 700 pipshigher and are still holding on to very profitable positions.Not all clients are sustaininglosses however. Smart tradersare holding on to their shortsfrom much higher levelsOANDA’s MT4 Open Order Indicator: Long and short open positionsMany retail traders use too much leverage and are undercapitalisedWhile it’s true that higher leverage increases the potential to profit when trading forex, this isa double-edged sword. Unfortunately, many retail traders fail to grasp this concept and oftentake on position sizes that are too large for their account balance.In conjunction with the misuse of leverage, many traders are also undercapitalised, whichmeans their aspirations are too high for their account balance. As such, they can often end uptrading position sizes that are beyond their means.5oandaMT4.comThe charts featured in this manual are for illustration purposes only
The Importance of Retail Sentiment Analysisin Forex TradingFrom bad habits to goodAs illustrated above, many retail traders are consistent with their bad habits, which is why it’sso valuable to be able to learn from the consolidated view of trading data. In order to gain acompetitive edge in your trading strategy, you simply need to invert these bad habits, whichcould be accomplished as follows:Trade evident trendsMany retail traders attempt to pick tops and bottoms, and while this may work in rangebound markets, it’s a recipe for disaster when the market trends. The key is to filter themarket type correctly. Stay away from choppy, indecisive markets and only trade in line withevident trends.Cut losses quicklyBefore thinking about the potential reward of a trade, define your risk correctly. Place yourstop loss at a level that invalidates your entry tactics, and do not hold on to losing trades inthe hope they will reverse.Ride winning tradesWhen the market is performing well, look for reasons to hold on to the trade. Many traderscut their winners, eager to pocket the profits, however the best traders ride their winners andmay add to the position when others are exiting.Use leverage wiselyTrading is about consistency and longevity, so you need to treat your trading strategy as youwould any other business. The best traders risk very small amounts (0.25-1 percent) of theirrisk capital on each trade, so their account can withstand many consecutive losses, enablingthem to weather the storm and profit in the long term.6oandaMT4.comThe charts featured in this manual are for illustration purposes only
The Importance of Retail Sentiment Analysisin Forex TradingTools that will help you learn from your peersOANDA offers a wide range of retail sentiment indicators that help smart traders makeinformed decisions:1. Historical Position Ratios (free)Highlights the evolution of retail client positioning2. C urrent Open Position Ratios (free)Highlights the divergence between longs and shorts3. T he Order Book (free)Offers a snapshot of OANDA clients’ open orders and open positionsView a tutorial here4. The Historical Order Book (free)Illustrates the evolution of retail client orders in connection with price movement5. The MT4 Open Order Indicator (Live accounts only) A real-time version of the free order book. Available exclusively to OANDA clients, theproprietary MT4 Open Order Indicator has changed the face of retail trading forever,revealing critical information never before available to the average trader. By presentingan aggregate overview of current buy and sell orders placed by OANDA traders directlyon MT4, the Indicator enables traders to capture market sentiment, identify large orderclusters and leverage weak hands, effectively stacking the odds in their favour byproviding the same advantages typically reserved for institutional traders and interbankdealersThanks to these instruments, you can easily understand the aggregate positioning andreasoning employed by OANDA’s retail clients, and it is simple to build solid trading habits byinverting their thought process, gaining a competitive edge in your trading strategy.7oandaMT4.comThe charts featured in this manual are for illustration purposes only
The Importance of Retail Sentiment Analysisin Forex TradingCopyright and disclaimersOANDA makes no representation or warranty of any kind, express, implied or statutory regarding this article or any information containedor referred to in this article. The article is provided for information purposes only. It does not constitute any offer, recommendation orsolicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute anyprediction of likely future movements in rates or prices or any representation that any such future movements will not exceed thoseshown in any illustration. Past performance is not indicative of comparable future results and no representation or warranty is maderegarding future performance.The information in this article has no regard to the specific investment objective, financial situation or particular needs of any specificrecipient. OANDA does not endorse or recommend any particular securities, currencies, or other financial products. Nothing containedin the article is intended to constitute investment, legal, tax, accounting or other professional advice and you should not rely onthe reports, data or other information provided in this article for making financial decisions. You should consult with an appropriateprofessional for specific advice tailored to your situation and/or to verify the accuracy of the information provided herein prior to makingany investment decisions.OANDA accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental orconsequential loss or damage) from your use of the content in this article, howsoever arising, and including any loss, damage orexpense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this article, its contents orassociated services, or due to any unavailability of the article or any part thereof or any contents or associated services.The information presented in this article has been obtained from sources we believe to be reliable but we do not make any representationor warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed inthe article are personal to the writer and may not reflect the views of OANDA Asia Pacific.Disclaimer: OANDA Asia Pacific Pte Ltd (Co. Reg. No 200704926K) holds a Capital Markets Services Licence issued by the MonetaryAuthority of Singapore and is licenced by the International Enterprise Singapore. Trading in leveraged over-the-counter contracts forforeign currency, precious metals, and CFDs carries a high level of risk and may not be suitable for all investors. You should never putat risk any amount that you cannot afford to lose. Read our risk warning for more details.OANDA Australia Pty Ltd is regulated by the Australian Securities and Investments Commission ASIC (ABN 26 152 088 349, AFSLNo. 412981) and is the issuer of the products and/or services on this website. It’s important for you to consider the current FinancialService Guide (FSG), Product Disclosure Statement (‘PDS’), Account Terms and any other relevant OANDA documents before makingany financial investment decisions. These documents can be found here. 1996 - 2017 OANDA Corporation. All rights reserved. “OANDA”, “fxTrade” and OANDA’s “fx” family of trademarks are owned byOANDA Corporation. All other trademarks appearing on this website are the property of their respective owners.8oandaMT4.comThe charts featured in this manual are for illustration purposes only
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in Forex Trading Many traders try to pick winners instead of trading trends Many retail traders continue to try to pick winners, focusing on selecting tops and bottoms rather than riding trends. This practice can work as long as prices remain within a certain range, but as soon as the range breaks, retail traders end up selling into rising prices.
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SENTIMENT TRADER Page 3 of 5 8VLQJWKH6HQWLPHQW7UDGHU The Sentiment Trader shows the current long/short sentiment (25% long in the following example), and a chart of historic sentiment plotted against price action. In the example below, sentiment has remained consistently below 50%, i.e. a majority of traders have been short EURUSD.
OverviewMaterialsConceptual challenges Sentiment analysis in industry Affective computingOur primary datasets Overview of this unit 1.Sentiment as a deep and important NLU problem 2.General practical tips for sentiment analysis 3.The Stanford Sentiment Treebank (SST) 4.The DynaSent dataset 5.sst.py 6.Methods: hyperparameters and classifier .
