Lesson 1: Market Sentiment: What It Is and How to Capitalize It

Every trade has its unique trading system. With that, it's only expected for every trader to have diverse opinions about the forex market. 

• Some might think the market will be bullish, so they'll enter a long position to profit from it. 
• Some might believe it'll be bearish, so they think that going short is profitable.  

But despite having a sound and thorough explanation of why the market will move a certain way, you still lose.

Wondering why? You may forget to acknowledge that the market movement is driven by the collection of the views, ideas, and opinions of ALL the market participants, which is called market sentiment.

Lesson Highlights

• Traders' attitudes, moods, and opinions are also considered primary movers in the forex market. This market phenomenon is called market sentiment.
• The logic behind market sentiment is supply and demand in the market. When the sentiment is negative, there's an influx of supply, translating to high selling pressure. Positive market sentiment results in high buying pressure because of high market demand.

Market Sentiment 101

In its most basic form, market sentiment is the overall mood and attitude of all market participants regarding the forex market (or any financial market).

Market participants don't only encompass online traders. It includes the broker, liquidity provider, central banks, and other big corporations transacting forex. 

But how would the sentiment of these participants affect the forex market? You use the popular economic concept, the supply and demand logic: 

• A high demand and low supply translate to value appreciation 
• A low demand and high supply translate to value depreciation 

Assuming 30,000 forex traders want to enter a position for EUR/USD, 75% share the same positive market sentiment. In other words, 22500 forex traders believe that the market will be bullish, so they go long EUR/USD to profit from it.  

Due to the influx of buying traders, the demand for EUR/USD increases. Consequently, the EUR/USD value appreciates.  

If the market has an overall negative sentiment, the market is likely to decline in value.  

Here's the question: can traders profit from the market if it has a negative sentiment? Well, yes, they can capitalize on the depreciating market.  

Remember, forex trading has an interesting nature of allowing traders to profit from both upward and downward market movement. Simply ensure you position your trade in the right direction; buy the low and sell the high.  

Note: Market sentiment is also known as investor sentiment, market mood, market psychology, or market perception. 

Sentiment Analysis 

In the forex market, sentiment analysis refers to the plating market movement through the lens of market mood, attitude, and opinions.  

Through sentiment analysis, you can know how the market perceives the asset (or currency pair), which can greatly influence the currency pair price movement.  

Remember, a positive market sentiment indicates a bullish or appreciating market. On the other hand, a negative market sentiment indicates a bearish or depreciating market. 

Here are the common ways to analyze the market sentiments:  

1. News sentiment analysis 

Sentiment analysis involves trading the news. With this, you must closely monitor the news articles, economic reports, central bank statements, and geopolitical development.  

After monitoring, you need to assess how these news releases might impact the market mood and opinion toward specific currencies. And how these sentiments toward the currency affect the forex market.   

2. Social media sentiment analysis 

Another way to analyze the overall market sentiment is through social media. You can look at social media platforms like forums and online communities to gauge public sentiment towards one's economy.  

By analyzing such posts, comments, and discussions, you can get a sense of the prevailing overall sentiment and the potential market reactions.  

3. Sentiment indicators 

In some trading platforms, you can use various sentiment indicators to aggregate and quantify market sentiment data. This way, you have a visual presentation of the readily available sentiment data.  

These indicators include sentiment surveys, sentiment indices, positioning data from futures markets, or sentiment analysis tools that analyze sentiment from news articles and social media. 

Advantages of Analyzing Market Sentiment 

Market sentiment is like a self-fulfilling prophecy. Why?  

Participants move the market because they drive up the market supply and demand; the market supply and demand are the primary market mover.  

Here are the common advantages you can expect once you trade while considering market sentiment: 

Get in touch with the market psychology 

By analyzing the market sentiment, you get a scoop into the collective psychology and emotion of the entire market.  

Understanding the prevailing sentiment can help you anticipate the market movement and trends free from your personal bias.  

Decide on your position direction 

With market sentiment, you have an idea of the potential direction that the market may tread. You can identify situations where sentiments are excessively bullish (positive) or bearish (negative).  

Using the market sentiment balance, you'll have a sound basis for your position's direction to gain profit.  

Remember, when the sentiment suggests a bullish market, it's best to enter a long position and exit your short position because the market will move upward. Likewise, if the sentiment is bearish, it's only profitable to enter a short position and exit your long position. 

For the next lesson, you'll learn the concept behind the Commitment of Traders (COT) report and how it can help you analyze market sentiment.