In addition to the two schools that are familiar to traders including Fundamental analysis and Technical analysis, Market sentiment analysis is also a very effective method of Forex trading. Today’s post will share all about it.
What is market sentiment?
Simply put, this is the common thoughts and feelings of people entering the financial market at any given time. These emotions include greed, excitement, fear, etc. All of these contribute to the sentiment of the market. It explains the direction in which the market is moving. For example, if investors suddenly panic, lose confidence, and decide to retreat, the market may fall.
The Forex market is a place where all different trading opinions, perspectives, and ideas gather together. That is reflected in the trading orders of everyone entering this market.
Every Forex trader will have a different view of the market. They will have their own explanations to explain why the market is so volatile. And they express that view through their own transactions.
Hence, the trader’s sentiment shows the direction in which the price is moving. And conversely, the price movement also helps us to understand the current mentality of those who are trading.
Market sentiment analysis school
The school of market sentiment analysis is less-known than fundamental analysis and technical analysis. Because it is usually intended for large institutional investors or investment funds with sufficient resources and market data.
Market sentiment analysis is an analysis that focuses on measuring the overall psychological and emotional state of all who are entering the market. This analytical method attempts to quantify how many percent of the Forex market participant is in favor of an uptrend or a downtrend.
Once the Forex market sentiment is successfully determined, the analyst is bound to have a COUNTERTREND transaction. They trade under the assumption that crowds are often confused.
Traders can combine market sentiment analysis with fundamental analysis and Technical analysis to add depth to their analyzes. They seek consensus of methods to make a decision with the highest probability. However, using all 3 methods skillfully, not all investors can do it.
The impact of market sentiment on Forex trading
A Forex trader must know that the market is a combination of many different perspectives, ideas, and opinions of all participants. Therefore, even if you have a certain assumption that the market is going up and then trade accordingly, you can also fail because most other traders don’t think so.
The psychological approach does not give you a specific entry or exit point. However, it can help you decide if you should follow that direction. To get the most accurate trading decision, you should combine it with technical analysis or fundamental analysis.
So this is the end of a series on analytical methods in Forex trading. There is absolutely no unbeaten method in the market. Therefore, you should never try to find a “holy grail”.
Choose for yourself the most suitable trading system. See it as a sword and sharpen it every day. At some point, it will naturally become a powerful weapon for yourself.
Sincerely goodbye everyone. See you in the following articles.