What is the Speculative Sentiment Index (SSI)?
The Speculative Sentiment Index (SSI) is a proprietary tool offered by FXCM. Many technical indicators, such as moving averages, use past data and in a certain sense look in a backward fashion to understand trends. The SSI, however, analyses current data and is considered a leading indicator, meaning it can often signal a change in market direction before the change happens. The index is published twice a day by FXCM.
Long and Short
The SSI focuses on the number of long vs short positions, comparing how many are active in the market and producing a ratio to indicate how traders are behaving in relation to a particular currency pair at any given time. A positive ratio indicates more long positions than short positions, while a negative ratio indicates that more short positions in the market.
For example, if the SSI indicator shows a reading of -4.59, it means there are 4.59 short positions in the market for every 1 long, and shows there is an overall preference for selling at the moment. If the indicator shows a positive reading of 3.26, it means there are 3.26 long positions are present in the market for every short, and shows there is an overall preference for buying at the moment. Each position is counted only one time regardless of the size of their trade.
Generally, the index is considered as giving a stronger signal about buy and sell trends above positive levels of 2 and below negative levels of -2. SSI levels of 2 or lower are considered weaker signals of sentiment.
A Contrarian Indicator
The SSI is considered to be a "contrarian" indicator, which means traders may want to trade in the opposite direction that the indicator is pointing. Thus, if the index is showing that there are more long positions in the market than shorts, it could be taken as a signal that the market is in an overbought condition and that there may be pressure to sell. Similarly, if the SSI is showing that there are more shorts in the market, this may hint that the market is in an oversold condition and that the moment could be favourable for buying.
SSI And Price: An Inverse Relationship
There are a several possible reasons why the SSI can be taken as a contrarian indicator.
One reason is that when there are many traders in the market positioned in a particular direction and price begins to move against them, their stop-loss orders will be executed with a domino effect, pushing price further in the opposite direction of the trend they had taken. Another is that traders often look to pick market tops and bottoms and can be wrong.
The ratio of the number of long vs short positions in the market may at times only be giving a snapshot of the market, and depending on the time horizon of the trade involved may produce a false signal. This is particularly possible in range-bound, sideways markets. For that reason, traders may want to use the indicator as a filter for other trend indicators, like the relative strength index (RSI). For example, if the RSI indicates a clear downward trend and the SSI shows the market is highly overbought, the trader may take those readings together as a strong signal in favour of a selling position.
Change in SSI Readings
Another valuable method for using the SSI is to monitor it for a change in readings. For example, if the index is at a positive level of 5.6 at one reading and falls to a level of 1.6 at the next, it could be a signal that we the trend will change and traders will begin buying. Similarly, if the SSI is at -4.2 and moves to -2.2, a trader could consider that a signal to soon begin selling.
The SSI is a unique indicator provided by FXCM that gives traders an inside window into how the market is feeling and behaving in relation to a particular currency pair. The index is considered a contrarian indicator that is most valuable when judging how to trade against the rest of the market. It's also particularly helpful to use as a filter with other trend indicators to help determine when the most opportune moment to enter into a trade is.
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The SSI indicator is available on Trading Station Web under the 'Sentiment' tab. If you prefer to download it for Trading Station desktop click here, or here if you are a MT4 user. Please note that the SSI for Trading Station desktop is free, but it does carry a cost for MT4 due to it being a 3rd party indicator.