FOREX THEORY
How to Develop a Market Sentiment-Based Approach
As a forex trader, it is your job to gauge what the market
is feeling. Are the indicators pointing towards bullish conditions? Are traders
bearish on the economy? We can’t tell the market what we think it should do.
But what we can do is react in response to what is happening in the markets.
Note that using the market sentiment approach doesn’t give a
precise entry and exit for each trade. But don’t despair! Having a
sentiment-based approach can help you decide whether you should go with the
flow or not. Of course, you can always combine market sentiment analysis with
technical and fundamental analysis to come up with better trade ideas.
In stocks and options, traders can look at volume traded as
an indicator of sentiment. If a stock price has been rising, but volume is
declining, it may signal that the market is overbought. Or if a declining stock
suddenly reversed on high volume, it means the market sentiment may have
changed from bearish to bullish.
Unfortunately, since the forex market is traded over-the-counter,
it doesn’t have a centralized market. This means that the volume of each
currency traded cannot be easily measured.
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