Every trader will have their own personal explanation for why the market is moving the way it is.
When trading, traders express their point of view in the trades they make.
But, no matter how certain a trader is that the markets will move in a certain direction, and no matter how nicely all the trend lines line up, the trader may still lose.
A forex trader must understand that the overall market is a synthesis of all the views, ideas, and opinions of all market participants. Market emotion refers to the collective feelings of market players.
The dominant feeling or notion felt by the majority of the market best explains the current trend.
How to Develop a Market Sentiment-Based Approach
It is your job as a forex trader to determine how the market is feeling. Are the indications pointing to a bullish trend?
Are traders bearish on the economy?
We cannot tell the market what it should do. But all we can do is react to what is going on in the markets.
It should be noted that the market sentiment approach does not provide specific entry and exit points for each trade. But don’t give up!
A sentiment-based strategy might help you decide whether or not to go with the flow.
To generate better trading ideas, you may always combine market sentiment analysis with technical and fundamental analysis.
Volume traded in stocks and options can be used as an indicator of sentiment.
If a stock’s price has been rising while volume has been falling, the market may be overbought.
If a sinking stock unexpectedly reversed on large volume, it could indicate that market sentiment has shifted from pessimistic to positive.
Unfortunately, because currency is traded over-the-counter, there is no centralized market. This means that the volume of each currency traded is difficult to quantify.