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Market sentiment is given a lot of importance in Forex trading and for good reason.
In this blog post we are discussing what Forex market sentiment is and how it helps traders. So if you are interested in learning more about currency trading and improving your trades, this might help you.
What is Market Sentiment?
Market sentiment is the general perception of the majority of traders about the market.
Whether the traders feel the price of a pair will rise or fall is called market sentiment. It is incredibly important to gauge market sentiment because it can make the difference between winning or losing a trade.
Why is it important
Market sentiment is important because it’s all there is to trading.
Forex is an OTC market. OTC stands for Over The Counter and it means that there is no centralized regulatory authority.
When there isn’t a body regulating the way the market moves the market participants drive the market basically.
If majority of traders feel a currency pair might rise then you will see the value of the pair rising indeed.
Why?
Supply and demand
The rule of supply and demand is simple.
When the demand exceeds supply a currency pair’s value rises.
When the supply exceeds demand a currency pair’s value falls.
And there is nothing behind supply and demand other than sentiment.
How it affects the market
If enough traders think that a pair’s value is rising then they would want to buy. When the market sentiment is bullish the market becomes bullish too.
Similarly, if enough traders think that the value of a currency is dropping then they will sell (because in the Forex market one can make money when a currency pair is depreciating too). So, when the market sentiment is bearish the market becomes bearish too.
How can traders use Sentiment Analysis to their benefit?
When price is continuously rising, it means that the market sentiment is bullish. When a trend has been established or it is clear that the move will be steady for a bit, you can enter the market by going long.
. The way contrarian trading works is by taking advantage of overbought or oversold conditions.
Every trend eventually ends. Once it has run its course there is usually a short period of time where it pushes on in the same direction but at this point interest has decreased and the currency pair is now overpriced. When this happens it is bound the trend is bound to change directions.
So market sentiment can also help you if you are following a contrarian trading strategy. Wait for the trend to run its course and then enter. If the trend is bullish, entering the market as a bear might prove to be beneficial.
We hope this gave you some ideas about new Forex trading strategies and you will be able to incorporate sentiment analysis into your trading plan.
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