The importance of market sentiment
Every person has a different perspective about something. For instance, there's a painting hanging on the wall. Person A will not see it the same as Person B sees it. There are a lot of factors like lighting, position, eyesight, and more. In short, we all have different views and take on things, just like how we have different political takes and sides. The same is true with forex traders and the way they view the market. One person may see a bear market, and the other may see a bull market while looking at the same thing.
They both have reasons why they can say so, and that will reflect on their following trading decisions. With that being said, a trader may see all kinds of signals and indications that there is an uptrend that he acts upon with trading decisions. However, he ends up losing the trade even with all the facts. What do you think happened there?
The market sentiment
There is a term called market sentiment if you are still not aware of it by now. Market sentiment is like a collective of all the participants' opinions about the market. This is all of the participants' views, takes, thoughts, and views of the market as a whole. You might feel one thing, but the majority of the market can feel another. So, one versus majority is somehow on the losing side, right? It is the reason why any trader should know what the market sentiment is since it most likely will tell you why the market direction is the way it is right now.
The market sentiment and you, as an individual forex trader
In trading, there are three essential types of analysis that we should maximize and utilize. They are technical analysis, fundamental analysis, and market sentiment. Nothing goes above the other, even when there are people who have a bias on a single analysis. It is not prohibited to use them simultaneously, so why not take advantage of that fact, right?
As a trader, you should know how most of the market participants feel. Do they feel bullish or bearish? Once we know that, it can help us make a better trading decision to act accordingly. However, we should remember that market sentiment helps us get trading ideas but not to the extent of giving an entry or exit guarantee in a trade. It can only do so much.
Stocks, options, and market sentiment
So, you are trading stocks or options, and you want to know the market sentiment? Look at the volume, and it will tell you a lot about the sentiment. A stock price rising with a declining volume is most likely an overbought market. On the other hand, a decreasing stock price with a rising volume most probably means that the market sentiment is going bullish from being bearish. This is the case for stocks and options, but it is not for the forex market because it is over-the-counter trading, and there is no central market. In short, there is no exact or easy way to gauge the volume of each currency.
So, how can we measure market sentiment?
A term called COT report,
also known as the "commitment of traders" report, can help us measure the
market sentiment. It might be a great help to check out what it means and how it works!
