Contrary Opinion and Bullish Consensus

The logic of contrary opinion is flawless; gathering the information is the difficult part. Once everyone is bullish or bearish, everyone who wants to be on that side will already be in the market. Where will the orders come from to take the new positions required to continue to drive that trend? Remember, once buyers buy or sellers sell, they have functionally no impact on the market until they offset their position.

Bullish consensus is typically measured by rating how many traders are bullish as a percentage of 100.

Markets are said to be oversold below 20 percent and overbought over 90 percent. Since traders are biased long, it takes a higher number to be overbought.

Markets do not become oversold or overbought very often; it takes a strong consensus to drive them to such extremes. But for the patient trader, it can be rewarding.

Tip: Using bullish consensus in conjunction with a simple trading system can be very effective.

Nor are the extremes the only information the trader can glean from regular bullish consensus figures. Divergence is also useful, even between the extremes. If prices move to a new high and the bullish consensus does not, this may be bearish.

Another concept developed by the author is expansion and contraction. It is similar to divergence. From a starting date, track the percentage move in prices up or down against the percentage move in the bullish consensus. When the ratio gets very high or very low, a sharp price movement in the opposite direction may occur.

The late Jim Bickford, co-author of the first edition of Getting Started in Currency Trading, conducted a great amount of research in FOREX contrary opinion and bullish consensus. The result is the GoodmanWorks FX Bullish Consensus, published weekly.

The FX Bullish Consensus, unlike other FOREX contrary opinion tools, uses only professional traders in its survey to compile the numbers. Our research found no statistical correlation or value in bullish consensus figures compiled from amateurs and part-time traders on forums or from so-called signal services. Why? Perhaps because amateurs now use so many diverse methods and systems, a consensus is no more than a statistical anomaly. As to signal services, not enough traders with moxie in the markets use them to make any significant difference.

Bullish consensus is the second external to the Goodman Method tool I use for my trading. See Figures below.

[caption id="attachment_13289" align="aligncenter" width="550"]Bullish Consensus -- Divergence 1 Bullish Consensus -- Divergence 1[/caption]

[caption id="attachment_13290" align="aligncenter" width="550"]Bullish Consensus -- Divergence 2 Bullish Consensus -- Divergence 2[/caption]

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

Posted in ...