Institutional traders have powerful advantages over individual investors. For example, they have real-time access to all their firm's client orders and positions. By watching a moving summary of what their clients are trading second-by-second, these people have an exclusive view into the market sentiment of their clients -- and they use this information to plan their next trades.

In an effort to help level the playing field, OANDA provides tools built by our own software team to show the overall market sentiment of our clients. As OANDA is one of the industry’s largest forex dealers, you could say the actions of our traders are a true representation of global spot rates and overall sentiment on how the market is changing. Any empirical data is welcome when trading in open markets, and OANDA is pleased to share this important information with individual retail forex traders.

Our Order Book tools have been available for a few years and they are among the most popular tools in our fxLabs wheelhouse. Despite this, some of our clients have yet to take advantage of all the benefits they provide. With this in mind, I’d like to give a summary of what they are, and then provide an actual example to show how they can be used to interpret the market and in-turn to give you the same historical data firepower the institutional traders strategize with.

Order Book Tools: A Primer

OANDA’s Order Book tools are available as a free download on our website and our software developers have designed them to work fluidly from any web browser on any mobile device or desktop computer.

We provide two key Order Book tools:

The Open Position Ratios  toolgives a one-page snapshot of the short versus long positions currently held by OANDA’s clients for every major currency pair. If there are more short positions than long positions for a currency pair, OANDA’s clients are bearish on that pair. On the other hand, if long positions exceed short positions, OANDA’s clients are anticipating a rising trend.

The Forex Order Book tool provides more precise feedback for any given currency or metal pair (you can choose from up to 16). The tool summarizes price trigger points with three charts on one page.

These tools cannot guarantee future market prices. The market will always react to news events and other fundamentals beyond the control of individual traders. Even institutional traders have to live with the fact that past performance is no guarantee of future results. However, the tools do show the previous actions and future expectations of a large sample of traders. Barring unforeseen market events, these market forces should influence market behavior if prices move in a particular direction.

The following example will illustrate how these tools can be used to interpret market pressures:

On Friday, September 14, 2012, the Forex Open Position Ratios chart shows that the USD/CAD currency pair had over 76.66 percent of its positions long (as opposed to 23.34 percent of its positions short). In other words, over 3/4 of OANDA traders placed long positions on USD/CAD, expecting the USD would increase in value against the Canadian dollar.

The Order Book from that same day shows more detail on this bullish sentiment:

After several weeks of falling in value, the USD/CAD pair was on the rise that day, especially by midday (as shown by the candlelight graph on the far right). The Open Positions chart shows consistently sized spikes for long positions over a range lasting several cents above market price -- perhaps indicating that traders continued to buy the currency pair as it fell, expecting it to rise in value. The strong bullish sentiment suggests that the pair cannot fall much further. Indeed, the market has placed no trades under 0.964, indicating an unusually strong psychological floor.

The predominance of sell orders in the Open Orders chart on the left could be interpreted either as an expectation by the market that it will capitalize as the price rises or a fervent hope by market players that the price would rise to give them some unrealized gain on the long positions they hold. There are three spikes set at 0.99, 1.00, and 1.004 -- if these prices were reached, they would each trigger sell orders and may serve as natural resistance levels keeping the value of the currency from rising too fast.

One Week Later

One week later, on September 21, the USD/CAD pair was up from the September 14 low: 

The Forex Order Book shows similar pressures from a week earlier, with a preponderance of long positions, most still sitting above the market price for an unrealized loss. The large spike of open long positions immediately below the market price could indicate a rash of recent trading due to strong bullish sentiment.

I encourage you to use these tools often to gain insight into how market sentiment influences currency movements minute-by-minute, day-by-day, and month-by-month.

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