After the devastating earthquake and tsunami struck Japan there was a record-high hike in the Japanese yen against the US dollar.
The dollar dropped to ¥76.25 unexpectedly, catching most currency traders by surprise but not many of the traders who were monitoring the forex market movements in 3D, making Speculative Sentiment Index (SSI) another key dimension in looking at price actions.
Speculative Sentiment Index
The SSI is a unique tool for currency traders, provided by FXCM, that reveals where the forex trading crowd are positioned, whether they are buying or selling, and where they are exiting or entering.
The SSI is not just the shadow of price movements in the past, which is essentially used in technical analysis, but it's a real trading book showing what other traders are doing at present. This information can help forex traders get a sense of the market sentiment, providing transparency in a mostly opaque forex market.
FXCM has the largest cross-sections of forex traders around the world and, therefore, has a credible amount of client data from which to draw the SSI. As of February 2011, FXCM's total retail trading volume was $250bn.
SSI - The Story of Yen Traders, Before and After the Disaster
The trading book's chapter of March 2011 reveals the third dimension of the volatile yen trading during the Japan disaster.
"While the market moves were certainly more dramatic than we expected, the SSI had been pointing to a strong yen rally for the whole week up to that point," says John Kicklighter, currency strategist at DailyFX.
"On the Monday following the tragic earthquake in Japan, we saw traders sell off the yen across the board. I think that they saw the price approaching the all-time low for the pair and thought, 'It won't go that far, here's my chance to sell yen at a great price.' So we saw the USD/JPY SSI skyrocket from under 4 on Monday morning to well over 9 by Wednesday afternoon EST."
An SSI reading of 9 means that there are 9 accounts long of a currency pair for every account that is short.
As the SSI screen tells the story, FXCM traders saw the all time low for USD/JPY to be ¥79.75, so their stops were all below the ¥79.75 level. Once USD/JPY broke that level, especially in the thin markets around 5 pm in New York, all those stops got tripped, and a huge wave of selling hit the market, as traders got out of their USD/JPY longs. That is where the SSI saw the spike.
A week later, the USD/JPY was just below ¥81 again and the SSI was back at a more normal 3.67. Kicklighter adds, "The fact that the SSI has stayed at the more normal level for a week now tells me that the USD/JPY had found a floor for the time being."
How to Use the Speculative Sentiment Index
During trending market conditions, the majority of forex traders sell into rallies (when the prices go up) and buy into declines.
The historical data at FXCM shows that the successful traders are often the ones who move against the direction of the majority of forex traders and use the SSI as a contrarian indicator.
FXCM's innovative SSI is a gauge for the market sentiment, giving the forex trader ideas about what to trade by analyzing what the trading crowd is doing. This forex trading guide gives the investor the opportunity to go against the majority during the aggressive shifts in sentiment.
Speculative Sentiment Index
All FXCM account holders can access free SSI updates twice a day.
Spread Betting, Contracts for Difference (CFDs) and Margined Forex trading are leveraged forms of investing which carry a high level of risk. You may incur losses that are in excess of your initial stake or investment. Make sure that you only speculate with funds you can afford to lose. Before trading ensure you recognise the risk. These products might not be suited to all kinds of investor. Seek independent investment guidance if necessary.
Article provided / approved by Forex Capital Markets Limited which is authorised and regulated in the UK by the Financial Services Authority, reference number 217689.
'FXCM Speculative Sentiment Index' edited by DB, updated 23-Aug-11
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