Forex market sentiment and fundamental disturbances often result in price fluctuations. What is market sentiment and how does it affect prices?
In the forex market, price fluctuations often turn the market upside down in an erratic direction. This is none other than the market sentiment and the influence of economic fundamentals.
Also Read: 5 Ways How to Learn Forex Fundamental Analysis for Beginner Traders
However, what is market sentiment? What effect does it have on our forex trading? How to anticipate it?
What Does Market Sentiment Mean
Market Sentiment is an attitude of mutual agreement (consensus) from market participants, to anticipate price movements under certain conditions.
This attitude is an accumulation of various fundamental and technical factors, including price formation patterns and the release of economic data or global news that are considered important.
These various factors together form a perception of the investment market community.
Each trader has their own opinion about the market, such as:
- Wow, the market sentiment is bullish, here. Not bad if it’s profitable
- Gold prices soared due to North Korea vs US sentiment
- And etc.
They also have their own reasons why the market moves in a certain direction. When trading, the trader expresses his opinion after observing the trades he makes.
But sometimes, the market also moves in a certain direction that is beyond the trader’s expectations, so no matter how good the trend that has been created, the trader ends up still experiencing a loss.
A trader must realize that the entire market is a combination of all the views, ideas and opinions of all traders in the market (which of course vary). This combination of views of forex market participants is called market sentiment.
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Terms Related to Forex Market Sentiment
There is some popular jargon regarding market sentiment. The most common are the terms bullish and bearish sentiment.
Rising prices indicate that the market sentiment is bullish, while falling prices are bearish indications. Here’s a full description:
- Bullish Sentiment: Market players are optimistic about an asset, so many make a purchase and push the price of the asset up.
- Bearish Sentiment: Market makers are pessimistic about an asset, so many sell the asset and push the set price down.
- Risk Aversion Sentiment (High Risk Aversion, Low Risk Appetite): There is an increase in risk in the market, so investors and traders are busy securing their funds in low risk and safe haven assets, such as Gold, US Government Bonds, Japanese Yen, and Swiss Franc.
- High Risk Appetite, Low Risk Aversion: Uncertainty and risk in the market tend to decrease, so investors and traders dare to invest their funds in higher risk assets, such as stocks, emerging market currencies, oil, and so on.
Also Read: 3 Principles and Methods of Forex Analysis for Beginner Traders
The Importance of Learning to Understand Forex Market Sentiment
As a trader, it is your duty to know the market sentiment. You can’t tell the market what you want, but you can react to what’s happening in the market. Market sentiment is such a powerful driver that it can influence the direction and movement of the market.
What often appears in various media shows that market sentiment is indeed very dominant in influencing the dynamics of market movements.
Sentiment which is usually negative will weaken the market, otherwise positive sentiment will strengthen price movements in the market.
For example, if there is a dominant factor in the market which then forms a bearish sentiment, then market participants must immediately anticipate falling prices, which encourages them to immediately take appropriate action.
The action can be in the form of profit taking, hedging, or open selling in a number of assets. On the other hand, quick action by investors, by itself, actually accelerates price movements.
The downtrend of the price can be accelerated by the spread of information about the existence of this bearish sentiment.
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Indicators To Measure Market Sentiment
Basically, a trader or investor will be able to measure market sentiment using intuition. Certainly not a random decision, but from long experience and in-depth observation of market behavior.
Traders who use the Price Action analysis technique will observe market sentiment from changes in candlestick formations on charts that display price movements of certain currency pairs.
However, the indicators that are widely used by traders to monitor forex market sentiment are usually Commitment of Trader (COT) data released weekly by the Commodity Futures Trading Commission (CFTC), as well as Sell/Buy ratios which are sometimes issued by brokers. Forex.
Another one that is often used to measure market sentiment is the VIX. However, this is a mistake. According to Seputarforex analyst Martin Singgih, the VIX is an index to measure market volatility, not to measure sentiment.
The VIX (Volatility Index) was created by the Chicago Board Options Exchange (CBOE) to measure the volatility of the price movements of the S&P 500 index options in the US.
However, in reality it is used to measure market volatility in general. If the VIX goes up, it means that there is an increase in uncertainty in the market, while if the VIX goes down or the value is low, it means that market confidence is improving.
In short, market sentiment is an important part of the market itself. For an investor, sentiment analysis includes understanding the formation of sentiment and how to profit from the existing sentiment.
Sentiment formation, as already mentioned, emerges as a collection of various factors, whether it is fundamentals, technicals, chart patterns, economic data releases or important global news, as well as market cycles.
Thus, to study the formation of sentiment, we must read and study a lot of information on financial markets.
Do you know? Reading market information also requires special understanding so that there are no mistakes in interpreting its meaning. How to? You can find the answer in the article on Forex Trading Using Fundamental News.