Forex Trading Sentiment
Sentimental Trading isn’t so bad
Traders have been using sentiment to determine market direction for a long time now. Modern technology and an internet connection make trading sentiment just that little bit easier… a little.
What is Sentiment and how does it work?
To keep it plain simple. Sentiment is how the market feels. Yes, the market has feelings, and the market’s feelings are influenced by every single trader out there. The combined positions of every single trader. Let the market know if, overall, most people believe she will go up or down. But she is a tricky one the market, she makes it her mission to do the opposite of what most people believe. She will always try and prove the majority wrong.
In the following example, you will see phrases like net long and net short. These words simply mean that of all the orders these are the percentages of buy positions and sell positions. You will notice something interesting happen, and to some of you it won’t make sense, if it does not make sense to you it is okay because all you have to do is FLIP IT.
Market sentiment example- IG sentiment for AUDUSD
When Price is in the BLUE zone, most traders are holding Buy positions so the market is NET LONG.
When Price is in the RED zone, most traders are holding Sell positions so the market is NET SHORT.
If the majority of traders are holding Buy positions, should the market not be going up? If you look at the chart above, where price is in the BLUE zone, the market is falling, where price is in the RED zone, the market is rising.
Now it makes sense why so many retail traders lose money and the stats are the way they are. To make sense of this, let’s talk baby for a second. When you buy something, someone has to be selling it to you. So who do you think is selling to you when you buy? Mostly Big banks. Could be your broker but mostly, Big banks.
Where to find and how to use sentiment?
Finding this tool is simple, go to Daily FX and click the report they publish every 4 or so hours. The tool is from a market broker called IG Live, which is one of the biggest in the world, so if their numbers read NET SHORT or NET LONG it definitely means something.
How to use this in your trading is completely up to you. Most traders use purely for Directional Bias. If the market is NET SHORT, then you would be looking for BUYING opportunities and vice versa. Understanding which side you’re on will help tremendously in becoming a profitable trader. Go forth and may the sentiment be with you [ Or Not 😉 ]
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.