That is why it is vital to make highly rational decisions while looking at a trading chart. The behavior of the masses is simply an aggregate of individual actions. From mass hysteria to bullish overperformance, all of it revolves around how millions of people feel about the conditions of a given situation.
This concept is not new. People have been trying to profit or nudge market sentiment in their favor since it was first recognized. Elliot, Smith, Friedman, Hayek, Soros, Greenspan, and many others have tried to understand, contain, and eventually benefit from market sentiment. None of them has was right every time as emotions are impossible to predict, but that doesn’t mean it is impossible to use it in our favor when trading.
The perfect trilogy does exist
It is well known that the best things come in three. That is also true when it comes to Forex trading. Any good trader should be familiar with technical analysis, fundamental analysis, and market sentiment. All of them complement each other, which is why it is paramount to be familiar with them. To demonstrate how these three work, let's use a short example.
Even though Bitcoin is not a traditional currency, it is still governed by the same rules as Forex. As 2017 came to an end, Bitcoin technicals showed that the cryptocurrency was perfectly poised to keep the run going. The fundamentals supported the same story, with news about more institution thinking about adopting the first crypto coin. However, market sentiment was that Bitcoin was going to devalue.
The reason for the negative outlook? Fear of South Korea changing its rules regarding crypto and analyst shorting the coin due to concerns about overvaluation. By the end of January 2018, market sentiment was proven right, and Bitcoin went from $19,000 per BTC to $6,000 per BTC.
This is a perfect example as to why any good trader must look at market sentiment when making trades. The technical and fundamentals might look healthy, but if no one believes in them, the forex pair will not perform according to projections. The example also highlights the two primary emotions that rule the markets: fear and optimism.
So, how to trade Forex based on sentiment?
The answer is, don't. Market sentiment in Forex is not about future market moves, but about current market feelings. It is impossible to predict how traders will feel about a pair in the future. But, it is incredibly helpful to know how they feel about it right now.
Market sentiment, when it comes to forex, is not about predicting the future. It is about understanding the present. The future of a pair is rarely dictated by what tomorrow might bring. It is usually controlled by what happened today. So, take care of the present, and the present will take care of the future. That's how you make money trading sentiment.
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