HOW TO USE

IG CLIENT
SENTIMENT
IN YOUR
TRADING
USING IG CLIENT SENTIMENT: ADVANCED GUIDE
HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

Contents
How to Use IG Client Sentiment in Your Trading........................................................................... 3

What is IG Client Sentiment? ........................................................................................................... 4

How to Analyze IG Client Sentiment ............................................................................................... 6

Trading with IG Client Sentiment .................................................................................................... 9

Disclaimer ........................................................................................................................................ 11

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

How to Use IG Client Sentiment in Your Trading

Welcome to our trading guide on IG Client Sentiment (IGCS) – a unique tool used for gauging retail
positioning and sentiment across FX, commodity, and equity markets. Traders take various
approaches to analysis whether it be with a focus on fundamentals, technicals or a combination of
the two.

It is also common for traders to develop a comprehensive strategy that combines several analytical
tools into a cohesive framework. Analyzing market sentiment is one example of the many tools utilized
by traders to improve their decision-making process. We can turn to IG Client Sentiment data, which
can be accessed in real-time on our DailyFX.com sentiment hub, for an unparalleled view of trader
positioning and sentiment.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

What is IG Client Sentiment?

IG Client Sentiment is a summary of the latest retail client positioning data from IG Group - the world’s
largest CFD (contract for differences) provider 1. This global footprint delivers a robust sample size for
IGCS readings that are, in general, reflective of the market as a whole. IG Client Sentiment data is
listed for key markets like EUR/USD, crude oil, the Dow Jones and Bitcoin among many other popular
markets.

Similar to the Commitment of Traders report, which details positioning of futures traders, or the Put-
Call Ratio, which reflects positioning of options traders, IG Client Sentiment also gives insight on
market positioning, but from the perspective of retail traders. This segmentation helps IGCS readings

1 According to IG Group annual report published August 2020.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

stand out relative to other market positioning reports. Further, seeing that IG Client Sentiment data
can be retrieved for free in real time, it has a superior ease of access.

We typically look at IG Client Sentiment through the lens of a contrarian considering the data is
concentrated on retail trader positioning. IGCS functions as a contrarian indicator because retail
traders, generally speaking, attempt to call market tops and bottoms (i.e. reversals) in lieu of following
the direction of a prevailing trend among other frequently-discussed poor trading habits common
among novices. As such, retail traders tend to be on the losing side of a position more often than not 2.

2According to IG Group public disclosures, 76% of active non-discretionary trading accounts were unprofitable for the calendar
quarter ending September 2020. Past performance is not necessarily indicative of future results.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

How to Analyze IG Client Sentiment

There are two key components of IG Client Sentiment. First and foremost is the percentage of traders
net-long and net-short for a given market. These figures provide a high-level view of sentiment and
underlying bullish or bearish bias. This component also helps determine the degree of market
concentration and, in turn, can be used to decipher the robustness of IGCS readings.

IGCS contrarian trading signals are typically stronger and more reliable when the percentage of
traders net-long and net-short are at extremes (i.e. trader positioning is skewed heavily to one side of
the market). The example of IGCS data below is a summary table that illustrates whether the majority
of retail traders are net-long or net-short for a given market.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

At the top end of the spectrum, we see the most extreme net-long markets while the most net-short
ones are shown at the bottom. Each horizontal bar is a segmented scale that adds up to 100%. The
blue portion reflects the percentage of traders net-long while red reflects those net-short. These depict
how crowded retail trader positioning is.

The greater the percentage of traders net-long alludes to an increasingly stretched bullish bias held
by retail market participants. Conversely, the greater the proportion of net-short positioning points to
a relatively more concentrated bearish bias. That said, it is important to remember that we analyze
IGCS from a contrarian’s perspective.

This is why the trading signal for a given market is often bearish when the majority of traders are net-
long. Conversely, when the majority of traders are net-short, the IGCS contrarian trading signal tends
to be bullish. This is not always the case, however, as there are some exceptions to the general rule
of thumb. The secondary component of IG Client Sentiment is the percentage change in longs, shorts,
and open interest over a specified time frame.

A summary table of changes in trader positioning is provided as an example above. Big swings in
trader positioning, as highlighted by the underlying changes in net-long and net-short positions, can
warrant a closer look at the respective market. For example, if the majority of traders have been net-
long but there was a notable decrease in the number of traders net-long, this could hint at the potential
for a reversal in price trend.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

Also, analyzing these more-detailed measurements of changes in positioning can supplement the
overarching IGCS contrarian trading signal by either bolstering or discounting it. This is why
combining the readings of net-long versus net-short positioning with the changes in trader positioning
can sometimes lead to conflicting or mixed IG Client Sentiment signals.

These primary components of IGCS are combined into an easy-to-read dashboard with an example
seen in the image shown above. The ‘symbol’ column lists the asset. The ‘signal’ column is the
directional trading bias based on the underlying sentiment data. The ‘net-long’ and ‘net-short’ section
highlights the proportion of traders that are bullish or bearish in a given market. The portion detailing
the ‘percentage change in longs, shorts, and open interest (OI)’ reflects the shift in trader sentiment
over a specified time period - either daily or weekly.

Specifically, the illustration above provides an example of IG Client Sentiment data on gold. According
to the data, 83% of retail CFD traders were long gold. Simultaneously, there was a -23% reduction in
short positioning compared to a week prior. Considering we generally take a contrarian view to crowd
sentiment, the sharp decrease in shorts (i.e. crowd sentiment turned relatively more bullish) led our
IGCS contrarian indicator provided a signal to look for potential bearish trading opportunities.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

Trading with IG Client Sentiment

Once again, the key to using IG Client sentiment is keeping in mind that we use the data as a
contrarian indicator to price action. The nature of a contrarian is echoed by the infamous quote by
Warren Buffett, “be fearful when others are greedy and be greedy when others are fearful.” In other
words, a contrarian is someone who places a trade in the opposite direction of the crowd.

This means that a contrarian would look for bullish trading opportunities when market positioning
reflects a broadly bearish bias, and vice-versa. One of the reasons we view IGCS as a contrarian
indicator is because retail traders tend to fade momentum (i.e. selling in an upward-trending market
or buying into a downward-trending market). Looking at a direct overlay of IG Client Sentiment on a
price chart helps illustrate this.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

The example above is of spot GBP/USD overlaid with IG Client Sentiment spanning from 01 January
2020 to 21 December 2020. The price scale is pinned to the left axis while the right axis measures
the percentage of traders net-long. The lower portion of the image reflects the aggregate changes in
the number of traders net-long and those net-short. We can visually see how crowd sentiment tends
to inversely track price action, which underscores our contrarian approach to analyzing IGCS data.

In fact, if we hone in on spot GBP/USD price action between July 2020 and December 2020, we can
see that the currency pair climbed over 1,000-pips from the 1.2500-level into the 1.3500-handle. Yet,
in spite of the bullish trend, IG Client Sentiment data showed that the majority of traders turned net-
short and generally maintained their bearish bias.

Lastly, we must note that sentiment indicators are not timing indicators. In the final example above,
IGCS showed that retail CFD traders were largely short GBP/USD. But, this does not necessarily
mean that we should simply go long. Instead, we can interpret the IGCS reading as a directional bias
- i.e. the indicator suggests whether one should look for opportunities that align to a market that is
rising or falling.

To summarize, IG Client Sentiment data can provide unique insight into trader positioning and
emotion. IGCS readings are viewed as contrarian indicators to price action and it is why the trading
signal is often directionally biased against the crowd. Incorporating the analysis of this tool might help
traders supplement their comprehensive strategy by serving as an important component of a broader
framework.

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HOW TO USE IG CLIENT SENTIMENT IN YOUR TRADING

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