Retail sentiment indicators: useful or just popular

[Amanhasnoname]

Some brokers publish the percentage of their clients long or short on each pair. It is often described as a contrarian signal: when most traders are long, price tends to fall.

The idea has some logic, since retail traders tend to be wrong at extremes. But the data comes from one broker's clients, a limited and unrepresentative slice.

Its timeframe is also a problem. The readings update slowly compared with a scalper's decisions. A shift from 70 to 65 percent long is meaningless on a five minute trade.

Some find it helpful as background context on a multi-hour scale, or as a signal at very extreme readings. Others find no edge at all.

The test is the same as for any indicator: record the readings and the following price moves over a few months, and see whether any relationship appears after costs.

Treat claims of reliable signals with caution, especially when the source is a broker whose clients are the ones being measured.

Has sentiment data ever added anything to short-term trading?