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.
SSI has many applications in forex trading. It can signal buying or selling opportunities as well as reinforce a bullish or bearish trend bias. In this way, SSI is a powerful market sentiment and FX volatility indicator.
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.
There are two forex market sentiment readings local to the SSI:
- Positive: A positive ratio indicates that there are more long positions than short positions. A positive SSI suggests that buyers are in control of the forex market in question and that a bullish trend may continue. Conversely, it may be interpreted as a signal that the market is overbought and a reversal could develop.
- Negative: A negative ratio indicates that there are more short positions in the market than long ones. Accordingly, a bearish trading strategy may be appropriate as sellers are the majority and downward price action could extend. On the other hand, a negative SSI can be interpreted that a market is oversold and awaiting reversal.
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 that 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. These SSI guidelines do not constitute formal investment advice. However, they are useful to retail traders engaging the market with intraday, day, and swing strategies.
A Contrarian Indicator
The SSI can function as a "contrarian" indicator, which means traders may want to trade in the opposite direction that the indicator is pointing. Under contrarian strategies, one buys against bearish price action and sells against bullish price action. In many cases, this is a countertrend methodology that contradicts sentiment data and items such as open interest.
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. Assume that the SSI for the AUD/JPY is reading 3.75 during an upward movement of price. A contrarian may interpret this data as being a signal to sell the AUD/JPY despite the bullish pressure.
On the other hand, 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. For instance, let's say that the AUDUSD has an SSI reading of -4.0. Given this SSI parameter, a contrarian trader would look to buy the market in the view that the AUDUSD is oversold.
SSI And Price: An Inverse Relationship
There are several possible reasons why the SSI can be taken as a contrarian indicator. Once again, contrarians buy when others are selling and vice versa.
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.
In either case, price action begins to reverse course in real-time. Contrarian traders aim to cash in on the pullback or retracement in asset prices. This type of trading is prevalent in the trade of crypto like Bitcoin, CFDs and in the stock market.
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 technical analysis 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.
RSI is a public domain indicator that is found in most trading platforms such as Metatrader 4. A quick disclaimer: the RSI isn't infallible. Be sure to practice proper risk management controls when using the RSI and SSI to trade financial markets such as cryptocurrencies, NYSE stocks, and the US dollar.
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 the trend will change and traders will begin buying. Similarly, if the SSI is at -4.2 and moves to -2.2, a retail investor could consider that a signal to soon begin selling.
The SSI is a unique indicator provided by FXCM that gives traders from New York to Tokyo an inside window into how the market is feeling and behaving in relation to a particular currency pair. It may be applied to all of the world's FX pairs, such as the USD/JPY, GBP/USD and EUR/USD.
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.
The SSI indicator is available for a live or demo account 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.
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