Monday, 14 August 2017

Market Sentiment: A Good Way To Trade?

Posted by Valentine at 01:31 Labels:

Market sentiment is one of the first terms you’ll get in touch with when initiating a trading career and there is a good reason for that: it is a goddamn important one.

If you still haven’t heard of it or heard of it many times without really understanding what people around you is talking about, here is a definition:

Market sentiment, also known as investor sentiment, represents the attitude of market participants toward a particular asset or market. It can be thought of as crowd psychology, indicating whether most investors are betting a certain asset or market will move up or down.

If prices of a particular asset are heading downwards, it means most traders are opening or already holding short positions on that asset, which could be reflected as a bearish market sentiment. On the contrary, when prices move north, it’s likely that market sentiment displays what’s called a bullish market sentiment, indicating most traders are opening long positions.

Sentiment is most popularly displayed as percentages. Considering that 100 percent represents the total market, 65 percent could be opting for long positions against the other 35 percent.

The useful side of market sentiment indicators become clear once these reach extreme levels, showing a certain asset or market is overbought or oversold and gives a correction signal.

Just to be clear, if market sentiment shows that 90 percent of traders are bullish on the EURUSD, it would be unlikely that traders will continue to push the pair higher.

Instead, such representation indicates that the pair is soon or later going back down again and maybe it’s time to take profits and take on some short positions instead.

It’s important to say that sentiment indicators do not offer exact buy or sell signals. That’s why traders should use another ways to confirm that a correction is about to start or it’s already in motion. Assets could show extreme sentiment levels for quite some time without materializing any visible trend changes. In other words, be careful out there.

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