The retail sentiment (forex sentiment on myfxbook) is essentially an inverse indicator which can be used to determine which direction to trade in. However, my initial thoughts are that it could be better used as a filter to avoid premature entries.
The theory behind retail sentiment is that the majority of traders are unprofitable, so it is best to not follow the crowd in terms of bias in the market.
The myfxbook tool calculates the % positions long and short on a currency pair, based on the net lot sizes of traders trades that have accounts linked to myfxbook. There is enough traders to give a relatively reliable overall sentiment for a pair.
What I have found for my trading so far, is that there seems to be a dropoff in strategy performance when the sentiment is 80% or more in favour of my trade idea. For example, NZDCAD having 95% of people long, whilst I am also about to enter a long position.
For my trades since May 1st, all that had a score over 80% in favour of my trade either lost or were BE. That is not enough data to confirm this to be a useful tool, but it is interesting nontheless.
51% - 80% is still technically trading with the masses, what I found though is the nature of Sam's strategy (higher timeframe trend following, entering on shorter-term reversals) does not really suit using retail sentiment as a bias determiner.
What I have noticed is that Sam's strategies aim to get in at the earliest point of a shorter-term trend reversal in the direction of the weekly trend, which usually does not line up well with the retail sentiment in terms of it having a reading in favour of your trade direction (e.g. long USDCAD showing bearish retail sentiment (below 50%). This is what led me to look for a % which could act as a filter to avoid trading in conditions which may not yet be suitable for a reversal.
Another interesting part of the tool is that you can click on a pair and see how the net long and short lots have changed over time. Sometimes a % may be high still, but net lots in the direction of your trade idea are decreasing considerably, that can be an early indication of a trend change.
Of course, it is still too early to have any data-backed thoughts on the tool, but I am tracking it for my trades for now, so I will give an update when I have more data.
It might be something worth tracking with your strategy to see how it would filter trades, for better or worse.
Here is the tool if anyone wants to check it out!
