Market Sentiment Forex Trading
Humans are naturally emotional. It is due to the traders’ knee jerk and emotional reactions to the news and events that result in violent price swings in prices of the traded asset, creating trading opportunities. The market subsequently makes a correction and gradually settles down when the emotions of the traders alleviate. the market correction takes place. In other words, market sentiment measures the overall psychology and mood of the traders in the market; a bullish trend represents a bullish market sentiment, whereas a bearish trend represents bearish market sentiment.
Successfully determining the market sentiment allows traders to trade in the right direction or allows traders to even take a contrarian position if the market sentiment indicates a trend reversal. Various indicators exist to study the market sentiment of the market.
Sentiment indicators quantify the number or percentage of traders holding long and short positions, allowing traders to measure the market sentiment and take positions accordingly. The following are some of the popular sentimental indicators traders use to gauge market sentiment.
1- Commitment of Traders Reports:
The CFTC (Commodity Futures Trading Commission) publishes a weekly report on total positions held by different traders categorized into non-commercial, commercial, and non-reportable segments. The report is released on Friday each week after the market closes.
Many trading platforms have incorporated the data into their trading charts as an indicator, with two lines showing total long and short positions of large speculators and commercials. You can check for crossovers i.e when the speculators switch their positions from net long to net short or vice versa, you should expect a strong trend.
2- Futures Open Interest:
Open interest is the number of futures contracts still open and not yet settled. An open-interest data of futures contracts can give you valuable insights into the current strength of the trend and tell whether the trend is sustainable or not.
For example, a bullish trend in a currency pair coupled with rising open interest is a signal of a strong bullish trend and suggests that the trend is likely to continue. On the other hand, a bullish trend coupled with low open interest is a signal of an upcoming reversal.
3- Moving Averages:
Traders typically use a crossover of 50 and 200 SMA (Simple Moving Average) lines on price charts. When the 50 SMA line crosses above the 200 SMA, the sentiment of the market is bullish and vice versa.
Sentiment analysis can be done using various other tools as well. Whenever you find a signal to trade based on the sentiment analysis tool, you should always confirm it with another tool as well. If two tools give you conflicting results, it is better to avoid trade.