You may have guessed that the ideal time to go long or short comes from the extreme market sentiment.
If you notice the example from the previous lesson, speculators (green line in the figure) and hedgers (blue line in the figure) send opposite signals. When the market is bottoming out, hedgers choose to buy, and because of lower prices, speculators choose to sell.
When the market is running towards the top, hedgers start to be bearish, and when prices are climbing, speculators continue to be bullish.
As a result, speculative positions indicate the direction of the trend, while commercial positions may signal a turn.
If hedgers continue to increase their long positions and speculators increase their short positions, the market bottom is likely to form.
If hedgers continue to increase short positions and speculators continue to increase long positions, the market top is likely to form.
Of course, it is difficult to determine when market sentiment reaches an extreme state, so it is best to do nothing before the actual trend turns.
It can be said that speculators, because they follow the market trend, they can seize the vast majority of market conditions, but the judgment of the market trend turning point is usually wrong.
On the other hand, commercial traders will miss most of the trends, but can seize the opportunity to reverse the price trend.
Before market sentiment reaches an extreme state, it is best to follow the direction of speculators.
The basic rule is: every time the top or bottom of the market is accompanied by market sentiment reaching an extreme level, but not every time the market sentiment reaches an extreme level, it will form the top or bottom of the market.