A forex trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That’s right… EVERYONE.
This combined feeling that market participants have is what we call market sentiment.
It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market.
As a forex trader, it is your job to gauge what the market is feeling. Are the indicators pointing toward bullish conditions?
Are traders bearish on the economy?
We can’t tell the market what we think it should do. But what we can do is react in response to what is happening in the markets.
Using the market sentiment approach doesn’t give a precise entry and exit for each trade.aving a sentiment-based approach can help you decide whether you should go with the flow or not.
Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.
In stocks and options, traders can look at volume traded as an indicator of sentiment.
If a stock price has been rising, but volume is declining, it may signal that the market is overbought.
Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish.