A1 Trading Company

Retail Sentiment vs Smart Money

Sentiment analysis is fundamental in trading analytics. Most investors look to others to see what they’re investing in before they start investing. For instance, there are a plethora of traders who adhere to Warren Buffet’s investments, Jim Cramer’s hot stocks, or Cathie Wood’s speculative portfolio. In the forex world, most traders look at retail sentiment and COT sentiment. By knowing who is doing what, traders can better decide what market they should consider looking at.
Retail Sentiment from the A1 EdgeFinder

Retail Sentiment

Retail sentiment is the measurement of the overall long/short positions on a pair, commodity or index. Historically, the crowd is rarely correct picking direction. They will usually try to trade a reversal or catch a big swing against strong trends. Although this type of trading can work, it is not often that they are accurate. Sometimes, retail is too early, too late, and other times they are flat out wrong.

Smart Money Sentiment

The style of trading between the everyday investor and large institutions is night and day. The reason forex pairs are often “trending” is because smart money is taking big positions in one direction. If a pair looks overbought or oversold, it doesn’t always mean that there will be a reversal. That is because institutions are investing, and they make their moves specifically for the long term.
COT Report Data from the A1 EdgeFinder

How to Trade Retail and Smart Money Sentiment

When most entities seem to be in agreement with each other, it is usually an indication to follow. This is because large amounts of money are moving in or out of an asset. When retail is majority biased in one direction, it’s usually best to trade the opposite. The reason why is because retail is almost always trading in the opposite direction of smart money.

A way to keep track of institutional activity is to see what they are doing over time. On the Smart Money Tracker on the EdgeFinder, users can track the net long or short positions with price movement each week. This way, money flow and price action are easily compared.
COT Report Data from the A1 EdgeFinder
There is a significant degree of risk involved in trading securities. With respect to foreign exchange trading, there is considerable risk exposure, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.
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