Forex Capital Markets (FXCM) introduced a new product called the Speculative Sentiment Index (SSI) that tracks the collective positions of speculative (“non-commercial”) traders based on FXCM’s proprietary customer flow information.
FXCM calculates the index for the four most popularly-traded currency pairs: EUR/USD, USD/JPY, GBP/USD and USD/CHF. The concept is similar to the Commodity Futures Trading Commission’s (CFTC) widely-used COT report. However, while the CFTC releases its numbers only once a week, the SSI is calculated in real-time.
A negative SSI number indicates traders are net short, while a positive number indicates they are net long.
The absolute value of the number represents the amount by which longs exceed shorts or vice versa. For example, if the SSI in the EUR/USD is 2.55, it means long customer positions in the EUR/USD exceed short positions by a ratio of 2.55 to 1. Excessively high or low index values imply most of the speculative market is positioned in a particular direction.
A press release from FXCM states: “In addition to providing more timely information, the FXCM SSI leverages FXCM’s globally diverse client base of speculative traders. The data used to construct the SSI is `scrubbed’ clean of trading anomalies and unusually large orders to provide the most accurate picture of market sentiment.” It is derived from a set of roughly 50,000 technically-based short-term traders. The COT reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The weekly reports for Futures- Only Commitments of Traders and for Futures-and-Options-Combined Commitments of Traders are released every Friday at 3:30 p.m. ET.
According to FXCM, any SSI number above or below +/-3 generally represents extreme positioning. As a contrarian indicator, FXCM says the SSI is most effective when the customer base is positioned “incorrectly.” The firm says traditional technical indicators actually confirm the effectiveness of the indicator itself. When conventional technicals are performing well, most traders will be positioned on the correct side of the market, which means a tool designed to fade the consensus, such as the SSI, will be a losing proposition. FXCM says the SSI will perform best in relatively uncertain conditions choppy markets or periods of information updating and forecast corrections that lead to potentially severe and abrupt price reversals. In these instances, the technical-based speculative community tends to be positioned incorrectly more often than not, a consequence of unclear or conflicting short term indicators.
Although some traders we spoke to feel the SSI could be a helpful tool (at least one, albeit smaller brokerage, offers a similar product) for FXCM traders, the fact it reflects the trading activity of one firm made it less compelling than the COT, which uses currency futures data from the Chicago Mercantile Exchange (CME) –– a more comprehensive source.
However, some traders see it as a potentially useful tool.
“With the SSI, the information is more recent and therefore should be able to provide a fresher outlook into strengthening and weakening trends,” says Dale Sumy, a trader with Blackstone Capital Markets.
Subscribe to:
Post Comments (Atom)
Post a Comment