The forex market has millions of people trading with various strategy and processes. The art of trading can be an adventurous ride, but the twist of that ride is the market sentiment traders observe. Sentiment plays an essential role in the life of a forex trader, which can be a thin line between success and failure. Nevertheless, for most traders, their emotional condition has been dominated through market sentiments, which is one a huge problem that even sentiment forex indicator cannot solve.
With all you’ve heard about market sentiment, what do you think market sentiment entails? If you are a beginner, you can think of market sentiment as what traders should respond to, using their human emotions. It is the perception of what is happening in the market and how trades executed should play out.
Although the forex market is about predicting the market, it is not a thing of guessing. It’s about using the right technical indicator to get the best trade. Today, you will find sentiment forex indicators that enable traders to get an idea of what position most traders are contemplating on taking. The crucial thing about the forex market is finding entering the right position where the market moves to your direction – it is where the market sentiment is most reliable.
The Sentimental Forex Indicator
It’s human nature to follow the crowd, and this causes traders to build collective goals and ideas in trading. For example, most people will buy if they see the crowd buying. It is the same if they observe the number of people selling is higher; they will naturally enter a short trade. What these crowds need is a sentiment forex indicator that can help determine the overall feeling of traders.
What is this sentimental forex indicator? Well, it can be a numerical or graphical identifier designed to project the overall feeling of participants in the forex market. The idea of the sentiment forex indicator is to predict how different things such as unemployment, politics, inflation, and macroeconomic conditions influence the future behavior of traders.
Therefore, a sentimental forex indicator allows you to define whether traders are bearish or bullish to the current situations of the forex market.
What Is Market Sentiment?
Market sentiment is the prevailing idea or emotion that a large number of traders have in the forex market. Traders use various means to analyze the market; however, you can use technical, fundamental or sentimental analysis to analyze the market.
What makes sentiment analysis different from the technical and fundamental analysis?
Sentimental analysis is a type of forex market analysis that focuses on the overall emotional and psychological state of all traders in the market. The sentimental analysis quantifies what percentage of forex traders are bearish or bullish. Alternatively, it is about the pessimistic or optimistic nature of traders in the market.
However, trading based on sentiment is never a good strategy because it depends heavily on the bull to bear ratio along with using a sentiment forex indicator. Traders using sentimental analysis usually apply technical or fundamental analysis to complement the comprehension of traders in the market.
Importantly, using these three types of analysis simultaneously can be overwhelming; however, it requires some level of effort to achieve this feat.
Sentimental Forex Indicator for Forex Traders
Hardly can we omit or not mention any sentiment forex indicator in this article. Remember, sentimental indicators help to gauge the mood or emotion of traders in the market.
Today, we have a lot of them available online. However, we would look at three of these top metatrader indicators, which might be helpful when trading the forex market.
Contrarian Methods with Sentiment Indicators
The basis of this indicator is crowd behavior. In other words, you buy when the pessimism level is at its peak and sell when optimism level is at its peak. Using the contrarian approach only exist because market sentiment defines prices. Crowd behavior is based on the combination of the thoughts and processes of different traders.
There are specific tools included in sentimental indicators, which might help define a bearish or bullish sentiment. Although they are many, they offer numerous ways for traders to interpret them. Nevertheless, sentimental indicators like its counterpart are transparent and accessible for traders to use when trading.
Commitment of Traders Report (COT)
The COT provides updated information about trends and the commitment level of traders towards the trend. It does this by detailing the accurate position of both speculative and commercial traders in the future market.
Every Friday, the Commodity Futures Trading Commission is responsible for publishes the COT report. The report gives traders an idea of the sentiment in the market for a particular period. Additionally, it contains useful information that traders can use to make the necessary decision. Importantly, it is available for kind of traders – commercial and non-commercial.
The Speculative Sentiment Indicator
The indicator comprises of an index; an online broker FXCM releases this report twice a day. In comparison with the COT report, the speculative sentiment indicator compares the current number of buyers and sellers on a currency pair at a particular time when its details are released.
Interestingly, short-term traders can take advantage of the speculative sentimental forex indicator since most retail traders lose money when trading. The indicator can act as a diametric indicator of what direction the market is going. Alternatively, professional traders can use it to trade the opposite direction of the predominate direction of retail traders.
Conclusion of Sentiment Forex Indicator
The forex market is a massive market that there isn’t a particular way to trade the market. It is like a web of networks containing thousands of openings to go in; it is all about finding what works for you and take advantage of it.
However, all traders tend to use one or all market analysis to predict the market. While there are debates on which market analysis – technical, fundamental or sentimental analysis that is better, the goal remains the same. Every trader goal is to make a profit, and whatever strategy that works doesn’t matter.
Nevertheless, the forex market has numerous sentimental indicators with endless ways of interpreting the market. Importantly, it would help if you utilized such indicator, complementing it with other forms of analysis to get better trade setups. However, sentimental forex indicators tend to depend on financial news or reports. So when next you want to use a sentimental indicator, consider the news.
We have a lot of trading tools and indicators to use when trading the forex market, which you can check via this link. These tools can help give you better trade entry and result.