Using Sentiment, IGCS in a Long-Term Trading Strategy
Market conditions can last for extended periods of time, especially when analysed in the context of how well/poorly the underlying economy is performing. An expanding or contracting economy can guide or inform future monetary policy that is likely to have an effect on the forex market over the long term, or as the economic cycle unfolds. This article focuses on using IG Client Sentiment in a long term strategy.
Multiple Uses of IG Client Sentiment
IG Client Sentiment is often considered a leading indicator as it provides an estimate of future price paths which can be very helpful for traders. It is also a versatile indicator that can be applied across a number of time frames, meaning it can be applied to a number of different market conditions:
|Time Frame||Market Condition||Strategy|
|Long-term||Trending||Trading in line with the trend|
|Mid-term||Ranging||Buying near support and selling near resistance|
|Short-term||Breakout||Looking for large moves over a short period of time|
A typical economic cycle – although no cycle is alike – exhibits similar characteristics during each phase of the cycle. Economic cycles can be broken down into four main stages:
1. Expansion: Improvinge conomic conditions – GDP ticks higher, central banks start hiking interest rate hikes, declining unemployment.
2. Peak: The height of the economic boom – GDP reaches heightened levels, central banks are well into an interest rate hiking cycle and the labor market is at or near full unemployment.
3. Contraction: Worsening economic conditions – GDP falls, central banks become accommodative and drop interest rates and unemployment rises.
4. Trough: Economic depression/recession – GDP falls to low levels, central banks lower interest rates and implement other central bank programs to stimulate the economy. Unemployment rates rise significantly.
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How Market Cycles Can Inform a Long-Term Trading Strategy
Due to the cyclical nature of long-term trends, FX traders may look to focus longer-term approaches on trending market conditions. This can be driven by a host of fundamental factors, for example, when the economy is experiencing higher growth and higher interest rates, there can be potential for trends to hold for an extended period of time.
The challenge at this point, is timing, as traders look to ‘buy low, sell high,’ but rarely is there an obvious spot to begin implementing such an approach. This is where IGCS can help.
To adjust this to a longer-term time frame, traders can simply observe longer-term charts (daily, weekly, monthly), looking to harness trending situations of higher-highs and higher-lows or lower highs and lower lows for falling markets.
Once the trend has been found, IGCS can assist when timing entries in the direction of the trend. Look for an imbalance in trader sentiment of around 67% in the opposite direction of the trend. This is because retail client sentiment can be viewed as a contrarian indicator.
For more information on IG Client Sentiment and why it is considered a contrarian indicator, read our article, ‘ Trading on Sentiment: Using IG Client Sentiment Data’
Make use of technical or fundamental analysis to help time an entry into the market, making use of stops and limits to effectively manage risk.
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Long-term trading example using IGCS:
For example, the IGCS daily chart below shows an upward trending market with client sentiment showing a significant short imbalance with nearly 70% of clients short. The scale on the right hand side shows a reading of around 32 which means 32% of traders are long this market, meaning 68% of traders are short this market (100 – 32).
Technical and/or fundamental analysis can be used to identify preferential entry into the market while, once more, making use of stops and limits to achieve a positive reward-risk ratio.
Looking to trade in a simulated environment to better learn strategies, tactics and approach? Click here to request a free demo with IG group.
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