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When there is more short selling volume than long volume, traders expect a decrease in the price of the stock and when there is more long volume than short selling volume, traders expect an increase in the price of the stock. However, things could happen differently from what traders expect.
The indicator, I present here, calculates the percentage of bars where something unexpected occurred during a lookback period.
By unexpected I mean: short selling ratio higher than 50% and the stock price increases or short selling ratio lower than 50% and the stock price decreases.
The higher the indicator value is the more unexpected bars occurred. A value higher than 50% means that more than half the bars were "unexpected" during the lookback period. The indicator could be interpreted as follows; a change in the stock trend may occur if the stock trend and the indicator trend are heading to the same direction.
In order to calculate the price changes, I used the difference between the close price and the open price. You can change this, if you want, and calculate the price changes as the difference between the close price and the preceding close price. I have used the first solution, because the short selling data includes only transactions and volume that occurred during the trading session, it does not include pre-market and post-market transactions volume.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
