Summary on market sentiment analysis

Market sentiment is the market opinion about whether the currency pair is likely to rise or fall in future.

It is the changing perceptions and feelings of different traders in the market that run the market. Not the indicators or chart patterns or the candlesticks. Market sentiment is defined by the feelings, emotions and perception of all market participants.

As a forex trader, you should always aim at developing your market sentiment in relation to what the market is trying to tell you. This can be achieved by following the market trend direction, price action and momentum.

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.

It shows the positions of the two largest players in the market; the long and short positions held by large speculators and the commercial traders in the market.

The large speculators include the hedge funds and bankers, the commercial traders include corporations and retail traders.

The COT helps traders to weigh how heavily these investors are positioned in the market by comparing their net long and short positions.

Traders usually look on the extreme long or short positions in order to pick the market tops or bottoms. The market tops show that traders are extremely long, the currency is overbought and the prices are very high.

The market bottoms show that traders are extremely short; the currency is oversold and the prices have fallen very low.

By comparing long or short positions with the previous week’s reports you can see if more shorts or long positions were added.  A sudden shift in the position could also bring a sign of market reversal.

The COT reports cannot be relied on alone to execute positions. After interpreting the report you can use the information and align it with other technical and fundamental indicators to make your judgment to trade.

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