Using trader sentiment as your dominant binary options trading strategy can be lucrative, but you must have a thorough understanding of what the sentiment numbers actually mean, and when they may or may not be useful. Here, we will take a quick look at what trader sentiment is, and how to use it. We will also discuss the major drawbacks of the strategy and give you our overall recommendation on whether it is worthwhile or not.
Using Trader Sentiment
For all intents and purposes, once you understand trader sentiment, it is one of the easiest trading strategies there is. Many binary options brokers display a percentage number underneath the asset that you are trading. For example, if you’re looking at the EUR/USD pair, there will be a number displaying the percentage of call options and the percentage of put options. It might say 55 percent call/45 percent put, indicating that the traders looking at this are skewed toward long positions. Brokers will display this in a number of different ways, sometimes using visuals or graphics to better illustrate the point.
The strategy that is implied from this is quite simple. If traders are overall leaning toward call options, take out a call option, or vice versa. This is far too simplistic, though. Ideally, you would want to know what traders are doing for that specific expiry. This would give you far more helpful direction, especially if you had access to entry points and the amount risked. Even here, your information is incomplete because it doesn’t let you know what the traders’ success rates are.
Some brokers have attempted to overcome this problem by having “sponsored” traders of some sort. These brokers allow you to look at specific traders, see their important information, and then base your trades off of the trades that they make. It is a very similar concept to using a trading robot, but instead of going through a third party robot, you are mirroring the trades of another trader. Some brokers will just send you the information about the trades and let you execute them if you wish, while others are more fully automated.
Drawbacks to the Trader Sentiment
Easy, as you might have guessed, does not translate to accurate. Trader sentiment can be very accurate at times, and at others, it can be way off. And because different brokers use sentiment in different ways, it’s very unreliable. If your broker display sentiment as a percentage, with 75 percent of traders taking out call options and 25 percent taking out puts, this seems like a very easy decision. The sentiment points to call. But, what if there are four traders involved in these percentages, with three being inexperienced risk $25 each, while the one put option is a professional trader who has risked $10,000? The percentages do not illuminate this behind the scenes information, and as a result of that, broker-based trader sentiment numbers are almost completely worthless to you. You should avoid using them unless you are able to somehow gain better info about where those number come from.
Even if you decide to follow the top traders on your broker’s platform, there is an undue amount of risk if you don’t have enough information about the traders. This can be a helpful and profitable strategy, but only if you have all of the requisite info. Be sure that you are given the trader’s success rate, their profit numbers, and a list of previous trades, complete with expiries and entry points. Based upon this information, you can form a more complete picture of what’s at stake, and then make your decisions from there.
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