Market Sentiment and Its Importance in the Currency Market

Market Sentiment and Its Importance in the Currency Market

Being a Forex trader, understanding market sentiment can be the best tool in your arsenal. It allows you to read the market and know beforehand how to capitalize from the changing direction. Let’s learn about the market sentiment and discuss the impact it has on the Forex market.

Market sentiment or market feeling is the way how you feel about the financial markets and how they will react in the future. No matter if you trade stocks, Forex, or any other asset, market sentiment remains the same. At this point, you should know that the financial market is fueled by emotion and this is one of the major reasons the investors can find their opportunities to trade. For example, the price of the currency changes every moment and investors are reading it besides the fundamentals and often at times, the sentiment wins over the analysis.

Market sentiment also represents the mood of the financial markets and how its perception is among the traders. If the market is positive, it is known as the bull market. This happens when the traders are optimistic about the outcomes of their trades. In this condition, the prices remain on the favorable side. Contrary to the bull market, there is a condition called bear market. In this market condition, the traders are not optimistic about the outcomes of their trades and they hold their moves to wait for the market forces to act. The prices in this condition remain on the lower side.

It should be noted here that the market leans on one way or the other but every participant or trader in the market has their own view on why the market is performing in that way. The opinion of the majority often dictates the overall sentiment toward a market and there are some traders who bet against this sentiment. This can be risky but there have been cases when the traders have made it big by trading on the market sentiment.

Market sentiment differs on the market and may correlate with one another. When the bearish sentiment starts to surface in one market, the bullish sentiment may emerge in another. This can happen otherwise as well. Traders use different techniques to measure market sentiment. Moving averages, bullish percent index, high-low index, and more are being used traditionally to measure the market sentiment.

In December 2018, the overall Forex market sentiment turned bearish when several factors combined to unnerve the traders. The values of currencies started declining overall. The fear started to grow over the slow corporate earnings and after several years of double figure earnings, the growth was predicted to be just 3 to 4%. Similarly, the trade war between China and the United States of America got severe and a sluggish trend was witnessed in the Forex market. During this time, the market was severely damaged due to the market sentiment.

This real-life example has caused damage to several traders and investors in the Forex market. Due to this trade war, many tariffs were imposed on the US and the same reflected on their currency through devaluation.

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