Market sentiment: how to trade it?

Understanding market sentiment is key for success in this industry. It is one of the most common terms in your daily trading activity, simply because it is extremely useful to determine in which direction you should move next.

Let’s face it. No one wants to be alone. And that super basic psychological phenomenon applies in trading too. Market sentiment helps you understand where most people are heading, north or south, allowing you to follow the crown and therefore, avoid big mistakes.

Of course, mass f*ck ups happen too. I mean… nobody thought the US real estate market was going to fail until 2008. Why do I bring this up? Despite the fact that following everyone else out there feels like the right thing to do, remember that you are ultimately alone taking decisions.

So… don’t trade with blind eyes, thinking that market sentiment will guide you correctly to profits. Masses can be wrong. Masses can fail. Masses can lose A LOT of money. So before you follow the mass, better put some sense into it. Think first, then move.

Bullish vs Bearish

In Forex there are two ways assets can fluctuate: to the upside or to the downside. And therefore, there are two types of market sentiment that can be identified.

A bullish market sentiment is integrated by a large number of investors who believe a certain pair will move higher overtime. In this scenario, the vast majority of market participants will opt to open long positions, speculating on future higher prices to sell.

On the contrary, a bearish market sentiment is determined by expectations that a certain pair will fall overtime. Following this line of thought, traders will execute short positions in order to profit as the pair makes it way to the downside.

Is it wise to have a sentiment-based approach?

Honestly, the wise move would be to keep an eye on market sentiment but do not follow it just because everything is allegedly right about the market. Stay critical, stay safe.

If you understand how market sentiment is fluctuation, for example, moving up on long or short, then you can identify how people are reacting to the news.