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Open Position Ratio and its Benefits for Traders

Open Position Ratio and its Benefits for Traders

 

 

Is it true that the ratio of open positions can be used to measure market sentimentHow to use it to make a profit for traders?

Despite having a simple appearance, there are many benefits to the ratio of open positions that can be obtained by traders. Beginners may not really know what the open position ratio is and its use in trading. Actually, this feature is closely related to market sentiment and can be used as a reference for opening positions. But before discussing the benefits of the open position ratio and how to use it, let’s recall the ins and outs of market sentiment.

 

Getting to Know Market Sentiment

The movement of the forex market is full of price fluctuations that flip the market in an erratic direction. This is due to market sentiment and the influence of various factors. What is meant by market sentiment is nothing but the attitude of mutual agreement or consensus of market participants, to anticipate price movements under certain conditions. Several things that cause the emergence of market sentiment are the release of economic data, fundamental news that is considered important, or the condition of technical price movements.

There are several important terms related to the market sentiment that needs to be understood, namely:

  1. Bullish Sentiment: Reflects conditions when market participants are optimistic about an asset and are busy buying. As a result, prices are pushed up.
  2. Bearish Sentiment: Market participants are pessimistic and sell so that asset prices are pushed down.
  3. Risk Aversion Sentiment (High-Risk Aversion or Low-Risk Appetite ): When there is a lot of concern in the market, generally investors and traders will secure their funds in low-risk assets and safe havens (gold, US government bonds, Japanese Yen, etc.).
  4. Interest in High Risk (High-Risk Appetite or Low-risk aversion ): Currently on the market fears began to fade, market participants will feel more daring to invest funds in high-risk assets such as stocks, currencies of developing countries, and so on.

Understanding market sentiment is very important for traders because this is a very strong driver and can affect the direction of price movements. Usually, negative sentiment can weaken the market and vice versa. Ideally, if there is a dominant factor and has the potential to form a bearish sentiment, market participants must immediately anticipate it. This can be in the form of hedging, profit taking (if you have a floating buy position), or open sell positions.

 

Get to know the Open Position Ratio and its Benefits

The ratio of open positions is an indicator of market sentiment which is a built-in feature of certain brokers or trading exchanges. Usually, this indicator is displayed in the form of a percentage or main data that represents the number of comparisons between the buyer (buyer) and the seller (seller) in an asset.

For example, in a broker, 100 people are trading with the GBP/USD pair. Of the 100 people, 75 of them made a sale, while 25 others made a purchase. So, the ratio of open positions will show that there are 75% sellers (short) and 25% buyers (long).

In the picture above, you can see the difference in market sentiment in contrast, where long positions are shown in blue, while short positions are represented in orange. This simple display allows traders to easily see the buying and selling power of a particular pair. So, what are the benefits of the open position ratio for traders?

1. Make It Easier For Traders To Understand Market Sentiment

The main function of the open position ratio feature is to help traders understand market sentiment easily. In general, the open position ratio display will display a comparison of buy and sell positions from the respective broker’s clients or certain exchange users. This feature serves as a sentiment indicator to help traders understand market conditions. Are market participants busy opening long positions, or are they busy selling?

 

2. Helping Traders Determine Positions

After knowing what positions are taken by market participants, traders will find it easier to determine positions. For example, the ratio of open positions in the EUR/USD pair at broker A shows 65% buy, while the rest sold. A trend follower will usually follow market sentiment. However, traders looking for reversal signals may wait until the trend momentum weakens and open short positions.

It should be noted that the ratio of open positions cannot be used as the only guide to open positions. This feature only serves as an overview of the condition of assets at a particular broker. If a trader compares two ratios of open positions at different brokers, the results may not necessarily be the same. Therefore, other analysis methods such as price action or other indicators are needed to get a more confirmed analysis.

 

How to Use Open Position Ratio

To be able to read the ratio of open positions properly, traders must pay attention to the ratio of the comparison between currency pairs. Usually, a currency pair is said to be balanced if it has a buy and sells percentage in the range of 35% to 65%.

However, when there is a very strong movement in one direction, the ratio of open positions can become very unbalanced. When conditions are extreme, traders can wait for a currency pair reversal. Usually, most traders will open positions in the opposite direction because they believe that conditions have reached a saturation point. Keep in mind that this is not always true, because sometimes the market actually moves to continue the trend.

In addition, you should not be too hasty to open a position. First, study the data presented through this feature and wait for some time. To get more accurate results, traders are advised to use technical analysis such as support and resistance to determine price targets.

For example, in the picture above, it can be seen that the silver asset shows an imbalance. More than 88% of market participants are selling the instrument, while the remaining 12% are buying. Thus, it means that the current trend is selling. You can then monitor price movements on the chart, if the momentum of price movements is still strong indicating a downtrend, then short positions can be taken by taking advantage of pullbacks. But if it turns out that the price has started to be oversold, you should not open sell.

The final word

Understanding market sentiment is very important in determining the opening of a position. This is one of the basic techniques that traders must master. The ratio of open positions can show market sentiment as a percentage, so it can help you understand whether the market is bullish or bearish. However, always use other analytical methods to confirm trading signals from the ratio of open positions.

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