Sentiment Analysis: What & Why?

 

 

Forex sentiment is the overall feeling of which market participants perceive the performance of a currency pair. This will ultimately determine their consequent trading decisions regarding placing, buying or selling orders. Sentiment is an important component of what drives movements in the forex market, so having the know-how is vital to best forex trading practice. 

So, as a trader, it’s your responsibility to determine the emotions in the market in order to gain the best forex trading indicator and decide on your next move. While you can’t command what the market will do next, you can make a calculated response as to what is going on in the market using this forex indicator. That’s why today, we’re offering up our specialist knowledge alongside our top forex trading tips, so that you can become profitable in your trading. 

What

A sentiment indicator is a numeric or graphical representation of how a certain group or person feels about the market or current forex environment. The aim is ultimately to determine the mood of the forex market.

Sentiment analysis is a type of analysis of the forex market which focuses on measuring the emotional state of all participants in the foreign exchange market. Sentiment analysis identifies the majority market sentiment and what percentage of the forex market participants are optimistic or pessimistic, with analysts then taking up a position based on their determined hypothesis.

Why

Ultimately, as forex traders, no matter how strongly you feel about a certain trade or market prediction, you can’t move the forex market in your favour. That’s why analysing the market is so important to informing your next decision. So, forex indicators are your best friend when it comes to making your next move or learning forex trading strategies. As a trader, it’s vital that you have a good understanding of the market to make profitable decisions, so this is where sentiment analysis comes in.

A good place to start is to decide whether the market appears ‘bullish’ or ‘bearish’, then incorporate your perception of market sentiment analysis into your trading strategy. By ignoring market sentiment, a trader would potentially miss out on a strong indicator of market direction, putting their next decision at risk before it has even been made.

The tools you need

As forex trading takes place over-the-counter, it’s absence of a centralised market makes knowing the volume of the currency traded a little more complicated. So, contrarian indicators and the Commitment of Traders Report are efficient tools for forex traders to utilise when measuring market sentiment.

Contrarian traders usually go against the present market sentiment, placing long orders when a currency is weak and short orders when it’s strong. However, sometimes the market shows extreme conditions, but continues with the primary trend. So, by analysing these trends, it can be vital to inform your next move and predict the next action of traders in the market.

An additional forex indicator, the data contained in the Commitment of Traders report is valuable to assist forex traders who aim to gauge the prevailing market sentiment. Particularly useful for making intermediate and long-term trade decisions, the report is helpful for identifying the strength of the prevailing trend and, consequently, your next move.

While sentiment analysis is very informative to your next move in the forex market, it’s imperative to carry it out alongside other types of analysis. The more information the better, so conducting fundamental analysis will work in cohesion to assist you in identifying profitable trading opportunities. Sentiment analysis allows you to understand other trader’s positions, so you can make the most profitable and appropriate trade decisions possible. In short, deciphering the current market sentiment can help you confirm the prevailing trend or look for a potential market reversal.

Forex chart

If executed correctly, sentiment analysis can make the difference between success and failure in forex trading practice. Now you’re equipped with the know-how when it comes to sentiment analysis, what are you waiting for? 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 in good stead for your forex career.