Sentiment Trading Strategy

17. Sentiment Trading Strategy 17.1 What Is Traders Sentiment?

One of the most influential factors in financial markets including Forex is supply-demand pressure (or buyerssellers pressure). In Forex, as a sparse market, we are not able to measure this factor in real time, but fortunately, a very close estimation of it is in hand that is called sentiment.

Sentiment, as it is understandable from the word is the feel or opinion of the traders about the market. In a given time, a part of the traders sense the market as bullish and tend to open long positions and the other part sense the market as bearish and tend to open short positions. This game is repeated all the time and the opposite sentiments of the masses act as a considerable supply-demand force. So, the trick is to look at the sentiment charts and follow the dominant group.

Figure 17.1.1 Bull/bear sentiment evolvement

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If this historical sentiment is not valid at the current time (i.e. the chart shows 54% long sentiment but the market is steeply bearish) we cannot say that the mass think or sense bullish at the moment (and surely they don’t). So, how work around this complexity? The answer is to consider sentiment evolution or change during the most recent hours. Let me explain this with an example. Suppose that the sentiment chart reads 60%:40% long:short at 12 GMT. If three hours later the chart reads 63%:37% long:short we conclude that the market sentiment has evolved 3% for long. This 3% long evolvement reflects the most recent mass opinion about the market and also the most valid sentiment we can obtain. So, this later figure (3%) is the golden number that works for us and should be considered in our trading decision. 3% change may not looks much but if you notice that for example Oanda consists of tens of thousands of traders, this 3% evolvement is quite enough to show a significant change in sentiment. As such big brokers have a big community of traders, we can see them as representative of the worldwide Forex community and their opinion as valid as the whole worldwide traders. Always bear in mind that crowd sentiment is not valid (to show the price direction) and does not affect the market decisions all the times. Look at it only as a complementary signal in combination to other trading signals (chart patterns, price rejection etc.) to increase the winning rate of your trading.

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Figure 17.2.1 Traders sentiment as a leading signal

Figure 17.2.2 A sentiment trading opportunity

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