Sentiment, or Market Sentimentt, refers to a highly subjective feeling about market conditions.
Market Sentiment represents the mood of financial markets and the general feelings of traders, whether they are trading in the Forex market, the stock market, the bond market, the cryptocurrency market, or other markets.
If you are a short-term trader, it is definitely a good idea to know how the market is feeling.
Market sentiment, which often reacts to news, can play an important role in driving currency prices.
Each trader’s thoughts and opinions, expressed through the positions they take, help shape the overall sentiment of the market, regardless of the information.
Understanding sentiment allows you to tell whether the market is optimistic or pessimistic about the future of the price of an asset, such as a currency.
Ultimately, emotion shows up in price action.
Sentiment is what creates the supply (sell) or demand (buy) of money.
If traders believe a currency is moving in a certain direction, they will trade accordingly and potentially convince others to follow suit, increasing or decreasing demand.
When prices rise, market sentiment is considered bullish; when prices fall, market sentiment is considered bearish.
Measuring market sentiment can be a challenge because it is the result of multiple factors.
It may include information from Fundamental Analysis (FA) and Technical Analysis (TA) indicators. Recent news may also play a role in the process.
While they are closely related, it is worth noting that market sentiment and fundamental analysis are completely different things.
While sentiment is related to psychology and emotions , fundamental analysis is a way of looking at the foreign exchange market by analyzing the economic, social, and political forces that may affect currency prices.
Fundamental analysis shapes sentiment. Sentiment analysis determines whether the market is bullish or bearish regarding the current or future fundamental outlook.
One of the most important things for a trader is to determine the real reason why the market is moving a certain way.
Fundamentals tell us why certain things develop a certain way in the medium to long term. This emotion tells them why things are changing in the short term.
Many traders consider market sentiment to be a good indicator of potential short- and medium-term price movements.
That said, you can never know with 100% certainty when an emotion will change or end.
Just like individual emotions, the sentiment in the Forex market, and in financial markets in general, can change rapidly for a variety of reasons.
Emotions can last from a few seconds to months, depending on the intensity of the specific emotion.
If you are a short-term trader, identifying prevailing sentiments should be a top priority.
Why? Because any change in market sentiment can have a very significant impact on any trades you may make at any given time.
Greed and fear
Market sentiment can be seen as the result of the two main emotions driving financial markets: greed and fear.
The dominant sentiment in the market usually determines the overall sentiment of the market.
Most traders are accustomed to following the general direction of price, but eventually, a bullish or bearish price movement will peak.
It is important to know when the peaks are coming in order to avoid buying at the top (due to greed or FOMO) or selling at the bottom (due to fear or FUD).
Generally speaking, when sentiment becomes too optimistic (bullish) or pessimistic (bearish), the market tends to reverse and start moving in the opposite direction.
In other words, markets tend to rise when the majority of traders are bearish, and fall when overall sentiment is more bullish than normal
In this way, sentiment can serve as a contrarian indicator.
Market sentiment is one of the factors that contrarian traders look for.
If most people are bullish, they will consider selling or going short. However, if sentiment is too pessimistic, they may consider buying or going long.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
