Sentimental
analysis is what it sounds like – gauging the market sentiment. What does
that mean? Well, as traders, a part of our job is to determine if a
market is bullish, bearish, overbought, oversold, and to plan a trade for those
market conditions – basically putting all of the things we’ve learned up until
this point all together.
So how
do we do that? What tools can we use? And how do we react to certain
conditions? Well, that’s what we’re going to find out today – we’re going to
take a look into sentiment analysis in forex trading.
Now
there are a couple of ways to gauge different market conditions. Does
anyone know what those two things are? You guessed it: technical and
fundamental analysis. Now, in the School of Pipsology,
we’ve covered most
of the commonly used technical indicators out there for forex trading, so you
should be an expert at that already right?
But
how about the fundamental tools? What fundamental tools are available to gauge
sentiment?
Well, in stocks and options, sentiment is
measured using volume data. For instance, if a declining stock suddenly
reversed on high volume that means the market sentiment may have changed from
bearish to bullish. Or if a stock price was rising on gradually declining
volume, then that may be a sign of an overbought market.
But have you ever seen volume data on any forex charts?
Probably
not.
Being
that the foreign exchange does not have a centralized market, volume data
cannot be accurately calculated. So, where’s a trader to go to get such
valuable data? That’s where the COT report comes in.
Now,
before we dive in to the different components of trading styles, let’s look at
the profiles of a few traders, their trading personalities, and how it’s
affected their lives outside of trading.
Now,
before we dive in to the different components of trading styles, let’s look at
the profiles of a few traders, their trading personalities, and how it’s
affected their lives outside of trading.