Many brokers post on their trading platforms so-called “Indicator of traders sentiments.” It can be called in different ways, but it looks like this (see picture)
We see the asset and a “thermometer” – an indicator of how many traders have chosen the UP (or CALL) option and how many have bought a DOWN option (or PUT).
Whether this information could be interesting and useful for traders?
The answer: rather, this information is useless. Because:
- The values indicating trader’s preferences are averaged over time. Usually, it is a few hours, and in some cases – this is the value for the last 24 trading hours. It is clear that this information is meaningless.
- The figures gathered all transactions – those that were closed in “plus”, and unprofitable. Does it make sense to follow the unsuccessful trades?!
- The difference of a few percent (see for example AUD / USD) has very small information and can’t be used somehow.
When the trader sentiments indicator provides useful information?
There is only one thing that is of interest. If we know that the information is displayed in real-time (frequent changes in the sentiments numbers may partly tell us this) and there is a clear preponderance of bulls (those who buy the CALL) over bears (the PUT options) or vice versa. In this case, the broker is guided by considerations of the free market, namely – the law of supply and demand. In simply words that means – the higher the demand, the higher the price. With regard to this matter, we can assume that the broker raises entry price in the options (strike price), when everyone is buying and conversely – lower the strike price, when all sell.
BTW, we realized that the most interesting indicator that shows how traders think (let’t put this word) is in IQ Option platform. It changes in real-time that is why there is a sense to use it.