What is Forex Sentiment?
Sentiment in the context of the SWFX index represents actual trades and open orders executed within the SWFX marketplace, segmented by liquidity consumers and liquidity providers.
What Does SWFX Stand For?
SWFX stands for Swiss Forex Sentiment Index, which is a free sentiment index from Dukascopy.
What is the SWFX Sentiment Index?
The SWFX index is based on transaction flow information and has been created to show forex traders a comparison of long and short ratios between liquidity consumer and liquidity provider trader classes. The number of currency pairs is limited to the most popular, and include the following forex pairs (left) and individual forex currencies (right):
EURUSD USDGBPUSD EURUSDJPY GBPUSDCHF JPY EURJPY CHFGBPJPY AUD CADThe SWFX index is segmented by liquidity consumers and liquidity providers.
Who are Forex Liquidity Consumers?
Forex liquidity consumers are clients who use the services of Dukascopy and may be individuals, brokers, investment companies and hedge funds. The sentiment ratio of the forex liquidity consumers represents the percentage of longs or shorts in the overall amount of open trades, executed by forex liquidity consumers. The index includes liquidity provided by individual bids and offers from individuals in the forex liquidity consumer category, if that liquidity is not provided on a regular basis.
Who Are Forex Liquidity Providers?
Forex liquidity providers are the banks and other other liquidity providers who make up the SWFX marketplace. The identities of the SWFX marketplace forex liquidity providers is proprietary. Forex liquidity providers make a continuous market by quoting bid and ask prices on the currencies provided. The sentiment ratio of forex liquidity providers is opposite that of the forex liquidity consumers because for each executed trade, a position is entered into by both a forex liquidity consumer and a forex liquidity provider in opposite directions (long/short).
How Often is the SWFX Sentiment Index Updated?
As it states on the bottom of the SWFX Sentiment Index, updates occur every 30 minutes and represent current forex market conditions.
How Should I Use Forex Sentiment?
The SWFX Sentiment Index is designed to reflect the current market position changes of the forex market participants. In practice the changes in forex market position are initiated by forex liquidity consumers who are demanding liquidity of the forex liquidity providers by opening a trade long or short. Forex sentiment is a good gauge of current speculative interest in curency pairs and individual currencies. Because forex retail customers tend to have inferior information regarding future market swings than the forex liquidity providers, the SWFX Sentiment Index can effectively be used as a contrarian indicator. The most important readings for a valid contrarian signal are persistent one-sided sentiment by the forex liquidity consumers. Temporary sentiment fluctuations tend to be less important with regards to future or prolonged currency movements.
A possible use of the SWFX Sentiment Index is as a confirmation tool, in conjunction with other intraday systems such as channel breakouts, support and reistance or momentum indicators. Source: SWFX Sentiment Index:
If the strategy gives a BUY signal on EURUSD and the sentiment indicators for EURUSD and EUR are overbought, the trader should avoid entering into position. If the strategy gives a SELL signal on GBPUSD and the sentiment indicator for GBPUSD and GBP are overbought or at least neutral, the probability of a successful trade is increased.