Trading Strategy Based On Market Sentiment (Part I)
Most traders have a love hate relationship with the market thinking that the market is either against them or for them. Do you see the market as a big mechanical matrix which is devoid of emotions? How do you view the forex market is very important.
At anyone time, the market is emanating the emotions of currency speculators around the world. The truth is that forex market is just the compressed display of emotions.
A market is like a big living organism made up of millions of cells. Each cell carries its own functions and interacts with other cells of the body keeping the living organism alive around the clock.
Knowing what the market thinks and how it thinks is crucial to trading success. A forex market comprises millions of participants acting out their perceptions and emotions.
Ultimately, you as the trader are dealing with other traders out there in the market. These traders can be big institutional players or an independent individual trader like you and me. You need to know what the other traders are thinking at anyone time.
Market sentiment is the most important factor that drives the currency markets or that matter any financial market. What is the market sentiment? Market sentiment is simply what the majority of the market participants are perceived to be thinking or feeling about the market.
Traders form their opinions based on emotions regarding their strengths or weaknesses relative to other currencies. Traders tend to act based on what they feel and think of certain currencies. Market sentiment explains the current actions of the market as well as the future course of action. Market sentiment sums up to the overall dominating emotions of the market participants.
One thing you should know is that market sentiment is not logical. It is primarily based on traders emotions. These emotions are one of the greatest factors in the determination of the currency exchange rate.
Market sentiment is like a fickle lover. It is capable of changing its mind based on new information that can upset the existing emotion. Market sentiment can be bearish, bullish or just plain confused.
If the majority of the market participants want to buy that currency, the market sentiment is bullish and if the majority traders want to sell the currency, the market sentiment is considered to be bearish. The sentiments end up being mixed up when most market participants are unsure of what to do at a particular moment.
Suppose you can understand what the other traders are thinking and why the market is doing what it is doing. You will be in a better position to plan the entry and exit for your trade. Understanding the current market sentiment is important for you. You can exploit it with an appropriate strategy that can help maximize your trading profits. In Part II of this article we will discuss what factors influence the market sentiment in the short term as well as the long term.
