Understanding The Market Sentiment (Part I)
Jul 26, 2009 Real Estate
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How do you view the forex market is very important. Do you see it as a big mechanical matrix which is devoid of emotions? Most traders have a love hate relationship with the forex market. Most think that the market is either against them or for them.
At a particular moment in time, the market is emanating the emotions of currency speculators sitting on their trading desks or on their computers around the world. The truth is that forex market is just the compressed display of these emotions.
A market is like a big living organism. Think that this organism is made up of millions of cells. Each cell carries its own functions. It also interacts with other cells of the body keeping the living organism alive around the clock.
Knowing what the market thinks and how it thinks is crucial to trading success. A forex market comprises millions of participants acting out their perceptions and emotions.
Ultimately, you as the trader are dealing with other traders out there in the market. These traders can be big institutional players or an independent individual trader like you and me. You need to know what the other traders are thinking at anyone time.
What is the market sentiment? Market sentiment is simply what the majority of the market participants are perceived to be thinking or feeling about the market. Market sentiment is the most important factor that drives the currency markets.
Traders form their opinions based on emotions regarding their strengths or weaknesses relative to other currencies. Traders tend to act based on what they feel and think of certain currencies. Market sentiment explains the current actions of the market as well as the future course of action. Market sentiment sums up to the overall dominating emotions of the market participants.
One thing you should know is that market sentiment is not logical. It is primarily based on traders emotions. These emotions are one of the greatest factors in the determination of the currency exchange rate.
Market sentiment is like a fickle lover. It is capable of changing its mind based on new information that can upset the existing emotion. Market sentiment can be bearish, bullish or just plain confused.
If the majority of the market participants want to buy that currency, the market sentiment is bullish. If the majority wants to sell the currency, the market sentiment is deemed to be bearish. When most market participants are unsure of what to do at a particular moment, the sentiments end up being mixed up.
Understanding the current market sentiment and exploiting it with an appropriate trading strategy can help maximize your trading profits. If you can understand what the other traders are thinking and why the market is doing what it is doing, you will be in a better position to plan the entry and exit for your trade. In Part II of this article we will discuss what factors influence the market sentiment.
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