Forex Trading and Sentiment Analysis
We’ve already discussed about the first two pillars of forex trading, technical analysis and fundamental analysis and now it is time of bring into the spot light the third and final one which is the sentiment analysis. This one is ignored by most of the traders and we believe it is an important subject to discuss.
Why sentiment analysis is so important?
Source: http://www.forextips.com
The first aspect which should be taken into account is that the market is composed of a huge number of individuals. It is like a social network and in order to be able to generate profits you need to understand the general “mood” of the market. We know that you already think about emotions when you see the word “sentiment” but in this case the situation is completely different. When we talk about sentiment analysis, the market can be in three different moods:
-bearish
-bullish
-sideways or flat
These three situations are the only ones you will ever find and now the trick is how you can spot them.
The first and most common way to spot the market sentiment is by looking at the bigger picture of the price action. This is done on a higher time frame (it could be the 4h chart, daily chart, or weekly chart). By examining the overall market performance and by seeing how the price had evolved over a longer period of time, you can understand what is the sentiment of that particular market and then search for opportunities in that direction.
The second way to spot the market sentiment is by using price indicators. Moving averages and oscillators are a good start especially for beginners who do not manage to understand price action principles properly.
The third and final method focuses on the economic aspects or fundamental analysis. By examining the most important economic indicators of a particular country you can make a picture about how that country is doing and hence understand how the currency will be impacted.
Which one is better?
Each one of the above-mentioned techniques has strengths and weaknesses but from our point of view, it will be better to combine price action with some fundamental analysis in order to manage to spot correctly the market sentiment.