The Human herd and the Wisdom of the Crowd

Thanks to some web platforms we can see now over the net the Retail Sentiment.

Why this would be important?

I think that this is important because according to data from 2011: Retail FX is big business. Average daily turnover across the industry from retail traders is approaching the $200bn mark, a sizeable chunk of a $4 trillion a day global market (source).

At a first glance $200bn mark compared to the $4 trillion a day global market does not seem big. However when you combine this information with several other facts:

The information that 98 % of the volume in FX is speculatvie and only 2 % is fundamentally driven.

To move the EURUSD by 0.2 percent, a trade of 200 Mio

USD needs to be made, which requires as little as 5 Mio USD in terms of equity (source).

That means that this retail flow when acts as a herd (and it acts so very often) is able to produce certain market movements and reactions too.

Right now I will give you some screenshot so you can see the momentary picture from retail human herd directional bias.

От Oanda open orders




От Oanda open orders




От Oanda open orders

As you can see from those shots they are samples from the population of the hypothetical human herd.

Yes that exists humans in fact are acting as a herd on the markets, they open positions as a herd and they move their stops at specific places.

That makes the whole technical analysis tools of support and resistence work. I believe that machine order flow can't produce support and resistence by itself in the same way the humans do (this is a pure hypothesis).

From the screen shots you can see that the humans are acting as a herd and roughly the same ratios appear at two independant retail platforms: Oanda and Dukaskopy. Those two ratios are confirmed by the eToro traders insight.

However there is something even more interesting.

The advent of social sharing makes this even more pronounced. In eToro there are leading tradiers (most influential traders) and they are even more bearish than the normal herd.

От Oanda open orders

Check this shot, there you can see the top traders insight.

The most advanced forms of technical analysis schools always have emphasized patterns between retail traiders order flow (uninformed traders) versus the institutional orderflow (informed traders).

You can see for example the VSA (Volume Spread Analysis) and the the articles of Sam Seiden. However they use the limited tools available from the chart (open, high, low close and volume), and the natural support and resistence zones.

Here in this blog post I am trying to show you a direct observation of this phenomenon and to show that the herd activity is real and can be observed directly. The samples from Oanda, and Dukaskopy are sufficiently representive.

In another blog post I may show you how this happens regarding to the price and how the human herd adjusts itself acting like a real herd.

From there it is obvious for me that what masses do matters, but profiting from the herd slaughter I think is way too simplistic. You can check this article. There has been succesful instruments of improving the dynamics of the group. "Matches between traders and recommendations were based on an innovative algorithm designed to optimize information flow within the network. Even this small number of coupons was enough to move the entire network away from dangerously high levels of “groupthink,."

Is there a wisdom of the Crowd? Can you profit from that information and how?