To provide transparency to the over-the-counter forex market, many forex brokers publish the aggregate percentage of traders or trades that are currently long or short in a particular currency pair.
The data is only gathered from clients of that broker, and therefore provides a microcosmic view of market sentiment. The sentiment reading published by one broker may or may not be similar to the numbers published by other brokers. Small brokers with few clients are less likely to accurately represent the sentiment of the whole market (composed of all brokers and traders), while larger brokers with more clients compose a larger piece of the whole market, and therefore are likely to give a better indication of overall sentiment.
Many brokers provide a sentiment tool on their website free of charge. Check multiple brokers to see if sentiment readings are similar. When multiple brokers show extreme readings, it is highly likely a reversal is near. If the sentiment figures vary significantly between brokers, then this type of indicator shouldn’t be used until the figures align.
Certain online sources have also developed their own sentiment indicators. DailyFx, for example, publishes a free Client Sentiment Report combined with analysis and ideas on how to trade the data.2
Daily FX. “IG Client Sentiment.”