Back in the day, trading was a whole different ball game. There were no fancy charts or real-time data—just ticker tapes that traders had to analyze. The real game-changer came when technology allowed us to visualize market data through charts, ticks, bars, candles, and even some more exotic methods like Renko and Kagi. This sparked a massive interest in market speculation and led to the rise of various schools of technical and graphical analysis.
If you take a moment to Google this topic, you’ll be bombarded with a ton of information, complete with flashy images of arrows pointing up and down, and zigzagging lines. The number of interpretations for a single chart can be mind-boggling. You could have three analysts looking at the same chart and coming up with six different opinions, each one sounding perfectly reasonable.
After spending over 15 years in the trading area, I’ve come to realize that the essence of graphical analysis boils down to identifying the "suffering" participants in the market. Classic patterns and setups make it easy to spot areas of intense market activity and clusters of open positions. I’ll share some examples backed by data from open sources about the average long and short positions of retail traders. You might be surprised at just how predictable retail traders can be when they open their positions. This is a crucial insight: most retail traders think and act similarly, following the same setups and patterns.
Now, ask yourself: "If you were a hunter with this kind of valuable information about your prey, would you use it to your advantage?" Absolutely! This happens every day across various liquid instruments where retail activity is high.
Now, I can already hear some seasoned traders who’ve blown a few accounts chiming in, saying that patterns don’t work and that this knowledge isn’t enough. I get it—it’s not enough. But here’s the kicker: it’s not that patterns don’t work, the real question is, who’s getting the most value from them? Interpreting market patterns is just one piece of the puzzle, not the entire strategy.
Professional traders often plan and execute their strategies by capitalizing on the behavior of less informed participants in specific "hot spots" that attract retail traders. The mechanics are straightforward: a traders see a market situation that looks just like a chart from a technical analysis book they’ve just read and act. The bait's been taken, they have got 'em hooked.
The timeline varies: some traders catch on sooner than others, but most eventually realize they need to "dig deeper," learn more about market mechanics, and refine their trading strategies. This realization often comes with the sting of lost money. Anger, disappointment, apathy, and renewed hope—these are all stages that serious traders go through as they commit to this craft for the long haul, rather than just playing a game of chance to make a quick buck or "catch a rocket."
Now, let’s take a look at the situation with the Euro. The chart shows the average long and short positions of retail traders on a 1-hour timeframe, which is one of the most popular timeframe. The data is sourced from an open source as of Friday evening. Take a moment to really look at this chart. What jumps out at you?
Let’s zoom in and add some lines and arrows. Voilà! What we see is that the average long and short positions of traders almost perfectly align with the breakouts of local highs and lows. In trading literature, this is known as "trading the breakout."
From this, we can draw a preliminary conclusion: the "bulls" were lured into opening positions and ended up in a losing zone, while the "bears" are currently enjoying their moment in the sun, as the market is working in their favor, even if just slightly. In other words, market sentiment is leaning towards the bears. Great, we can wrap this up, right? Time to go home and just "short" the market.
Let's look at the May 2024 Yen chart. It's a 1-hour chart with Average Longs and Shorts positions.
So, what can we take away from this? A massive bearish candle (trigger) has clearly triggered a wave of short positions, while the "bulls" jumped in at the upper range boundary during its test. The market seems to be favoring the bulls, leaving the bears in a tough spot. The chart shows the typical behavior of retailers: a big bearish candle that makes people want to sell and enter the market. After the candle closed, the average short position confirms that this candle triggered a lot of retail activity.
You can dig open positions data up yourself if you put in a little time and effort, or you can find it on the "Retail Sentiment" tab here at ClashCharts.com platform.
Now, what’s the main message I want to share with you, my Brothers in arms?
Gauge Market Sentiment: Look at market sentiment through the lens of "suffering" participants. In my view, this is one of the best indicators out there! Understanding where the pain points are can give you a significant edge.
Leverage Open Data: Make good use of information from open sources about retail positioning. There’s a treasure trove of valuable insights waiting for you if you know where to look.
Adopt a Hunter’s Mindset: Approach the chart like a hunter on the prowl. Look for traps that have been set by other traders. Incorporating this kind of analysis into your strategy is crucial, without it, trading can feel a lot like playing roulette.
Trading is a journey, folks. Some traders catch on quicker than others, but most eventually realize they need to dig deeper, learn more about market mechanics, and refine their strategies. It’s a tough road, but the rewards can be worth it.
So, don’t throw in the towel! Dust yourself off and give it another shot. As 50 Cent famously said: "Get rich or die trying!" Keep pushing forward, and remember that every setback is just a setup for a comeback. Happy trading!
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