How to read market sentiment

 1. Trend

A trend is the most important indicator in the forex market.   Daily traders can use trends to define the market sentiment by looking at bigger time frames of the trend.

It works like this, being a short term trader or a scalper, you are so confident with your strategy . You have been on a chart and a setup shows up for a short, you become very excited and go ahead and sell after a while the trade changes direction and  you are already thinking of how to cut your losses.

This does not necessary mean you are a bad trader or your strategy doesn’t work. It’s just because you traded in a wrong direction, a correction of a long trend.

Looking at the trend on a bigger time frame gives a clear feel of the market. Compare the direction for the trend using both the small time frame and the large time frame and trade only when the two are in agreement.

 2. Price action

Using the price action you will be able to compare the traders response towards a certain pair of currency in both directions. If the market moves up very fast and slows while falling it shows that one currency is stronger than the other therefore more bullish or bearish.

This commonly happen at the time when the news is released.  When the news is positive the market will move up very swiftly and when the news is negative,  it will fall down as many investors sell off that currency. But if the news is positive and the market continues to fall instead of rising it shows a strong bearish sentiment in the market and the opposite is true.

More to that when there is positive news in the market but the market continues to move side ways it gives an indication of a probable bearish sentiment. This shows that the buyers are still undecided.

3. Momentum

 As price moves up and down on the market chart, the buyers and sellers are expressing their feelings and perception about the current status of a currency pair.

Momentum measures price movement with time and this can help you to tell who is in control of the market as price moves making lower highs or higher lows. This shows a reduction in strength of currency.

For instance if a currency pair starts making lower highs in an uptrend it shows that the bulls are losing momentum, equal swings up and down shows equal strength and making higher lows, the bears are losing it and a sign for a possible bullish reversal a head.

Market sentiment can also be measured using the commitments of traders’ report that is released by the commodity future traders commission CFTC every Friday at 2:30 pm EST.

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