Forex sentiment is the perception held by market participants which is gained when judging the performance of a currency pair. On the basis of this, traders will then make their trading decisions accordingly. Consequently, sentiment is a fundamental driving force of decision-making movements in the forex market.
As a forex trader, it’s your responsibility to make accurate and calculated judgements of the market by analysing forex indicators to decide on your next move. As it’s almost impossible to predict what the market will do next, using forex indicators, you can make a calculated forecasts as to what may occur. That’s why today, we’re offering our specialist knowledge alongside some forex trading tips to demonstrate how to put sentimental analysis into practise so that you’ll excel as a forex trader.
What is sentiment analysis?
A sentiment indicator is a numeric or graphical representation which can be monitored to determine how a group feels about the market environment. From a concluding hypothesis, traders can then make their next trading decision accordingly.
Sentiment analysis focuses on measuring the mood of the market, which is determined by its participants. Using sentiment analysis, one can identify the majority market sentiment, and whether it appears to be optimistic or pessimistic.
Why use sentiment analysis?
No matter how much experience you have as a forex trader, predicting the market is a dangerous game. As such, analysing the market is essential to informing your next trading decision. That’s why forex indicators are necessary to inform judgement of the market – by forming a hypothesis based on as many indicators as possible, the more likely you are to make a profitable decision.
To begin sentiment analysis, a great forex trading tip is to start by deciding whether the market appears ‘bullish’ or ‘bearish’. This way, you’ll gain an informative overview before making any hasty decisions. From there, you can incorporate this judgement into your trading strategy – as you’ll have accounted for all strong indicators of market direction. The more research you conduct, the less risk that your next decision will entail.
What will you need?
As forex trading is absent of a centralised market, it’s important that you understand the volume of the currency traded. The best place to start is using contrarian indicators and the Commitment of Traders Report to gain as much exposure to the market as possible.
Contrarian traders tend to place long orders when a currency is weak, and short orders when a currency is strong, therefore usually against the present market sentiment. By analysing these trends, you can begin to better inform your next move and predict the next action of traders in the market.
As another essential forex indicator, the data contained in the Commitment of Traders report is particularly useful to gauge the prevailing market sentiment. Refer to this report when considering long-term trade decisions, or identifying the strength of the prevailing trend, which ultimately should be considered before making your next move.
While sentiment analysis is a strong market indicator, it’s essential to conduct it alongside other types of analysis. As always when it comes to forex trading, the more information the better for profitable trading opportunities. By obtaining as much information as possible, you’ll gain a better perception of other trader’s positions, so you can make decisions that make great returns. To summarise, deciphering as much of the current market sentiment as possible is essential to confirming on the prevailing trend, or predict a potential market reversal.
When used alongside the right know-how, sentiment analysis can make the difference between successful returns or failure, making it an essential forex trading practice. Now that you know how to execute sentiment analysis correctly, you’ll be well on your way to making profitable decisions in the forex market.
For more useful tips and professional advice on how to best prepare yourself for your trading journey, sign up to one of our free seminars, where you can learn forex trading strategies and tips that are sure to put you on the right path towards your forex career.