In trading, it won’t always matter whether you’re an amateur retail investor or an experienced professional – some things will be the same for both types of trader.
After all, you’re using the same markets and you’re exposed to the same factors that move the markets. One of these is ‘market sentiment’.
And this is another part of investing that is shared no matter your level of expertise. But what is it, how can you understand it, and why is it important to be on top of it?
Market sentiment explained
The term ‘market sentiment’ is actually quite simple to understand – even if you’re a complete novice. In essence, it’s the prevailing mood or attitude that investors have in a specific market. You can think of it as a collective instinct as to which way a market is going to move, or how it is likely to perform over a longer-term period.
It’s also demonstrated through the use of the terms ‘bullish’ or ‘bearish’.
Market sentiment can take its cues from a wide range of factors. Topical news items can boost or suppress confidence – whether it’s on a national or international basis.
UK trader confidence got a metaphorical shot in the arm of its own thanks to the country’s Covid-19 vaccination roll-out, for example. Politics, economics, conflict, and brand performance can also steer the mood.
The impact of market sentiment
If a market is seemingly bullish, it means the prevailing mood is positive and this is reflected in rising prices. On the flip side, a bearish market is where the mood is deflated – and prices start to fall.
This can be particularly evident on the global forex market, where there are various and disparate factors affecting currency values from all corners of the globe.
There are also theories as to why market sentiment affects prices too. One of these is rooted in behavioural finance. It deals with the various cognitive and emotional aspects of investing.
And it suggests that investor decisions are not always based on rational thought or analysis. This, in turn, can cause significant movements in the market that aren’t always truly reflective.
Building sentiment-based strategies
It is, however, possible to devise trading strategies that are grounded in the prevailing market sentiment. As you take up your positions in no deposit bonus forex markets, a simple strategy can be to let the market guide you. This is a process known as ‘herding’, but it does have some merit for those prepared to play the long-term game.
That’s not to say it’s always the most effective strategy, however.
Fortunately, there are numerous tools to help. Indicators are available that allow an investor to measure the sentiment in the market.
The weekly Commitments of Traders (COT) report is also useful to some forex traders.
As the name suggests, it offers insight into the various trends and strength of holdings within several US futures markets.
It’s certainly not uncommon for individual investors to have instincts that go against the grain of market sentiment either. Making moves against the prevailing mood can be a risky decision.
At the same time, however, it can be a bold move that pays off. And, as ever within the global forex markets, there can be opportunities where you least expect it as a result.