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Understanding The Forex - What Is Market Sentiment?

May 31, 2012 | Comments: 0 | Views: 171

Market sentiment refers to the current mood or general opinion of the market participants as regards the prices of currencies. It is the dominating attitude that a good number of market participants think best explains the present movements in the foreign exchange market or in any other financial market. Market sentiment is often brought about by various things such as economic news released by countries.

In the Forex market, market sentiment is expressed by some terms. For instance, in a bullish market, a good number of traders believe that the price of a particular currency is likely to appreciate. Due to this positive sentiment, the price of the currency may go up. Conversely, in a bearish market, a good number of traders believe that the price of a particular currency is likely to depreciate. And, due to this negative sentiment, the price of the currency may be driven down.

Since market sentiment generally represents the direction of the market, you should place your trades based on the trend of the market. You may be caught on the wrong side if you try to place your trades against the prevailing trend. Placing trades according to the current mood of the market is referred to as sentiment-based strategy.

It is important to note that trading using this strategy does not give clear-cut entry and exit points for every trade. However, it is a good for knowing if you are to go with the flow or not. Importantly, you should combine market sentiment analysis with other types of analysis to assist you in identifying the most profitable trade opportunities in the market. You can combine it with technical analysis or fundamental analysis.

Market sentiment extremes are important in identifying trade opportunities. After all traders start trading in the same direction, there comes a point of exhaustion in which there are literally no traders left to continue the trend; consequently, the price of the currency pair starts to change direction.

Once the price of the currency pair starts to reverse, more and more traders will start to enter trades in the direction of the new trend. And, they will drive the trend until they decide that it is about to flip directions.

Regardless of the strategy you use for trading currencies, it is imperative that you know the present market sentiment before placing your trades. Trading while not considering the prevailing market sentiment can bring a lot of damage to your trading account.

Shawn Sofo James has 7 years experience in the Financial Markets, for PRO Investment Bank as an Investment Analyst, before becoming a day trading expert. Tip: Be updated with the latest Forex news if you want become a successful trader.

Source: EzineArticles
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