FOREX Sentiment Analysis Explained

Now, we know that price, in theory, reflects all of the available data and market information.  But if this was 100% true, how would there be a market?  If this was the case, wouldn’t every trader believe that a currency should behave a certain way?  Of course, prices have to fluctuate, and there has to be supply and demand for a market to exist…correct?

That’s right. Ultimately, every trader is their own individual, and they have their own beliefs, theories, strategies, and trading systems.  There are contrarian traders, who feel like the market is wrong about something, and might believe that the market is overreacting, or exaggerating, and decide to make a trade that goes against market sentiment.  Similarly, there are traders that almost ALWAYS follow the market, and might incur losses  when they find out that many people were wrong.  A great example is when there are sudden bubbles for example, that no one expected – such as the U.S. housing bubble that helped contribute to the recession of 2008, which affected global markets.

 

You know how in social media, your network has all sorts of different opinions?  One friend of yours might believe that a certain political candidate will save the world, while your other friend might think they are the scum of the Earth because some of their past statements or decisions.  The same way that people argue about sports and religion – you will find that many people have varying views on the market, what it’s going to do, and the agendas of governments, media outlets, and the accuracy of certain statistics.

 

The truth is that no matter how hard you believe something, your will cannot shape the market.  If you believe that the dollar is undervalued, and you would bet all of the money in your account on it, if the market sentiment is bearish – there’s nothing that you can really do about it, even if you are a highly-respected figure when it comes to finance.

 

Essentially, no matter who you are, you have to set aside your ego and understand market sentiment, and incorporate it into your strategy.  It doesn’t have to be the ONLY way you trade, of course, but it has to be factored into your overall outlook.

You will learn more about how to use market sentiment to your advantage later on.

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