What Is Market Sentiment In Forex Trading?
Market sentiment is the most important driving factor. Often, market sentiment is aligned with fundamental and technical, so that it can be considered as one method of analysis. It’s just that the sentiment is actually not fundamental and technical which is only an instrument of analysis.
In fact, market sentiment is at a higher level of fundamental and technical. That is because market sentiment is the main factor that triggers buyers and sellers’ actions, while fundamental and technical are tools that are used to predict market sentiment. How can this be so? Before learning this further, let’s get to know important terms in market sentiment.
Bullish, Bearish, and Risk Appetite
In recognizing market sentiment, the most commonly used terms are bullish and bearish. Bullish is a sentiment that reflects optimism, so players are more likely to buy. Conversely, bearish sentiment is dominated by pessimism, so that the players are more likely to sell rather than buy.
Price rallies in an uptrend are usually supported by bullish sentiment, while falling prices are created due to a bearish sentiment.
There are also 2 other terms related to risk interest, namely high risk appetite and low risk appetite. High risk appetite is related to market conditions which are dominated by high risk appetite among traders and investors. High risk interest means that market participants are optimistic about the economic conditions and prospects, so they dare to invest in high-risk assets. Conversely, low risk appetite signals market conditions that are very careful about taking risks. Usually, low-risk assets such as safe havens are the majority choice in this sentiment condition.
The Importance of Market Sentiment
Market sentiment is very important and must be understood by all traders. Basically, price movements in the forex market are accumulated from transactions of traders and investors around the world. Therefore, it can be said that prices are actually driven by ‘human hands’ which are susceptible to sentiment. This is the thing that makes prices in the forex market cannot be predicted with certainty.
For example, prices can weaken even though signals from 3 indicators are bullish. After further peeling, it turned out that market sentiment was being feared by new risks from the Central Bank’s interest rate cut decision.
Another example, prices actually moved higher after retail sales were known to decline worse than expected. Although usually having a high impact, the sentiment apparently did not take seriously the decline in retail sales. This is because in a larger fundamental framework, the economy is projected to grow better after the government implemented a tax-cutting policy. That is why, market participants who have taken into account the impact of new policies have reason to stay in bullish sentiment.
The two examples above prove that market sentiment has the most important role in estimating price movements. Unfortunately, the sentiment is more difficult to analyze, because it reflects a market consensus that can consist of a variety of methods, opinions, and subjective decisions. Responding to these difficulties, you don’t need to be discouraged first, because there are general ways that can be applied to obtain (at least) an outline of the sentiment that is being formed.
Estimating Market Sentiment
The most common way to estimate market sentiment is to do fundamental analysis. Market consensus is different, but the majority vote usually tends to adhere to the principle of fundamental relations and price movements. Unless there are other fundamental contexts that need attention and can have a major impact, you can focus on paying attention to the latest economic data or event releases to analyze those sentiments.
The next way is to pay attention to technical elements, especially when the market is not dominated by fundamental issues with high impact. Some technical analysis concepts that can be used to measure market sentiment are:
- Price analysis with SUpport Resistance
- High Low price movements
- Price Action
- Pattern Chart (triangle, head and shoulders, etc.)
You can also use broker tools or trading technology providers that display sentiment data on buyers and sellers. But this method of analysis has a disadvantage because it only measures market sentiment from certain groups of traders. Suppose you use the sentiment tool in broker A, then the market sentiment data that you get only reflects sentiment among broker traders A.
This is a brief explanation of market sentiment. If you want to better understand this material, don’t be bored and lazy to diligently do fundamental, technical analysis, and see the price movements of the price action. However, trading ability is not a thing