Forex Market Sentiment refers to the combined mood of all market participants. In other terms, it is the predominant emotion of the majority of market participants that accounts for the current market direction.
Forex Market Sentiment Analysis
Apart from fundamental and technical analysis, there’s also market sentiment analysis. This is a type of Forex market analysis that focuses on gauging the general psychological and emotional state of investors in the FX market.
The main objective of sentiment analysis is to find out what percentage of Forex investors are currently feeling bullish or bearish.
Placing a trade based only on current market sentiment is a contrarian method and is mostly dependent on bull and bear ratios, as well as other sentiment indicators. Therefore, market participants often perform sentiment analysis together with fundamental and technical analysis to thoroughly understand the current state of the Forex market.
Market sentiment analysis aims to survey experienced market traders, analysts and strategists about their overall feeling about the market. That’s why identifying the current market sentiment is actually knowing how market participants feel about the market at the moment.
When conducting market analysis, some businesses also look at trading data like block trades and short interest, as well as current market trends published by financial news companies. Furthermore, there’s another metric called the ‘ten-day advance decline line’ for the S&P 500 index.
It serves to display the number of stocks that advanced against the number of stocks that declined, and if that figure is continuously negative for more than 10 days, it indicates that the market is oversold.
However, keep in mind that there’s a clear paradox associated with the Forex sentiment. Conducted polls and surveys only tell you how the market has performed but it doesn’t tell you how it will move in the future.
Many times this resulted in the survey estimating that the market will move against the majority. In other words, periods of apparent bullishness will eventually result in sell-offs and market bearishness.
Sentiment Forex Indicators
Sentiment Forex indicator refers to a numeric or graphical indicator that displays how a particular group of market participants feels about the market or a business environment or some other factors. There’s a lot of information available online on popular market sentiment indicators. There are three of them mentioned below that you might find useful:
- Contrarian Methods with Sentiment Indicators
- The Commitment of Traders Report
- The Volatility Index (VIX)
In conclusion, Forex sentiment is an essential part of Forex trading and investing. The sentiment or the prevailing mood in the Forex market serves as an indicator of the current market direction. Complying with what investors talk about, be it optimistic or pessimistic helps in identifying the psychological and emotional attitude of all market participants.
This kind of analysis can be conducted to anticipate market movements based on the current market state. Also, to improve your sentiment analysis and make it more effective, it is advised to use sentiment indicators. These indicators are effective in gauging the underlying strength of market movements.
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