As easy as it looks to trade in Forex, it is a very complex market. Apart from their skills and knowledge, traders need to bring in the sentiment analysis of forex to analyze the market better. These sentiments purely depend upon how the trader personally feels about the market. Apart from what the indicators suggest, these sentiments can help the traders make a firm investing decision. Read the article to understand what sentimental analysis in forex is?
Defining Market Sentiment
Market sentiment is basically the point of view of the traders in the market towards it or any financial instrument. It is directly proportional to how the traders in the market feel about the market. If the trader’s sentiments remain positive, so will the market. But if the traders have a negative impression of the market, it can negatively affect it.
These Market Sentiments further help the traders to understand the market situations more clearly. With the help of sentiment tools and analyzing the market, the traders can assess the market sentiment and take investment decisions accordingly. Further, this sentiment analysis can help traders understand if the market is bullish. There is a visible surge in the price action, or bearish, where the financial instrument’s price is moving downward.
What is Sentiment Analysis in Forex?
Sentiment analysis in forex analyzes the position of other traders in the market, how other traders trade currency pairs. Usually, forex sentiment analysis evaluates net short or net long trading positions within a particular forex pair.
Forex sentiment analysis is a little different from market sentiment. While in market sentiment traders analyze the market situation, in forex sentiment analysis traders try to analyze the position of other traders in the market. Based on this analysis, traders make their decisions about trading in the forex. The scope of this analysis is not limited only to the forex but can be used for other financial assets as well. According to this analysis, traders take the opposite position of what other traders are at. For example, if the analysis shows that a larger crowd is in a selling position, traders will look for the correct time to take a buying position and vice versa.
Example of current forex sentiment analysis
Below is presented forex sentiment for major forex pairs based on all positions at Swiss forex broker Dukascopy:
Forex Sentiment Analysis Working
To be more clear of how forex sentiment analysis works, one can look at the following example. When Britain expressed its intentions to leave the European Union, the market sentiment became negative. As a result, in 2016, the value of GBP in the market fell to a 31-year low in terms of USD. After that, it was an up-and-down situation for GBP in the forex market. The sentiment became positive in the next year and then remained negative for the maximum of 2018. There was again a visible uptrend seen in 2019.
If there is a rising sentiment, it could imply that few traders are there who intend to push the trend to the upward side. Also, if this is the situation, traders are advised to look out for any price reversal situations. However, the trader should enter short if there is a negative sentiment and a visible downtrend in the price momentum.
How to Use Sentiment Indicators
Sentiment indicators can be presented in the form of graphs or numbers. Based on these graphs, one can understand the market sentiment situation. For example, a graph shows that 20% of the total traders are going short in a market, and the remaining 80% are going long. This will only imply that the position of 80% of the traders is long on the currency pair.
The two most commonly used sentiment indicators are (COT) Commitment of Traders Report and IG Client Sentiment.
Commitments of Traders Report (COT)
As the name suggests, COT is a report published and released every Friday by the Commodity Futures Trading Commission (CFTC). It is used as a market signal and clearly depicts the holdings of different traders in its report. With the help of this, traders can get a clear picture of the market sentiment and make their decisions accordingly.
Instaforex Sentiment gives a clear description of how many long and short trades are there in the market, but it can also help the trader trace the expected turning points in the market sentiment. See below current forex sentiment:
Each broker offers different market sentiment.