You will see Sentiment Analysis in less training courses. Often the types of analysis are considered only technical analysis and fundamental analysis. While analyzing emotions can be very important and effective. Emotion analysis is used to measure the feelings of other traders towards a particular currency pair.
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We have already said that price fluctuations should theoretically reflect all the information available in the market; But unfortunately, for us (ie Forex traders) it is not that simple.
Forex markets simply do not reflect all available information; Because all traders act in the same way.
That’s why the sentiment analysis in forex is important. Every trader has his or her own opinion on how the market operates and whether or not to trade in the same direction.
The market is exactly the same as Instagram. It is a complex network of people who want to dominate our way of thinking or our product.
Aside from the joke, the market basically reflects how all traders, including you, Warren Buffett, or Mr. Neighbor, feel about the market.
The opinions and ideas expressed by each trader in different situations help to form the general feelings of the market, no matter what information is contained in it.
The problem is that as a small trader, no matter how confident you are about a particular trade, you will not be able to turn the Forex markets to your advantage.
Even if you really believe that the dollar will rise and you feel right, but others oppose it, you can do no more. Unless you are George Soros or Goldman Sachs.
How do we understand the feelings of traders?
If you have been trading Forex for a while, you have probably seen the image below.
Analyzing the feelings of traders in Forex
Such information can usually be found on the brokers’ website. This shows us what percentage of the broker’s traders are in the buy transaction and what percentage is in the sale of a particular currency pair.
For example, according to the above information, 73% of traders are in the sell trade and 27% in the buy / EUR trade.
And for USD / CHF we see that 83% are in the buy trade and 17% are in the sale.
These show the feelings of the traders in this broker.
As a trader you need to consider all of these issues and you need to analyze the market climate.
How to trade based on this information?
It’s up to you to understand how the market feels, whether the market is bullish or bearish.
Then you need to decide how you want to integrate your understanding of market sentiment into your business strategy.
If you want to ignore market sentiment, this is your choice. But we explicitly tell you that this is to your detriment!
Emotion analysis is often used as an inverse indicator. There are several ideas as to why this happens (that is, why is emotion analysis used as an inverse indicator?)
One idea behind this is that if everyone (or almost everyone) feels the same way, then it is time to modernize and trade against public sentiment.
For example, if everyone is optimistic about the Euro / US Dollar (Euro vs. US Dollar), this might be the time to sell (that is, do the opposite).
Why? Unfortunately, you have to read most of the school lessons to understand
Another idea is that most forex traders are (unfortunately) novices and losing money. Depending on where you get the statistics, between 70 and 80% of small traders lose their money.
So if you know all these useless traders who are usually wrong and are currently in a position to buy the EUR / USD ……………. So what do you do?
Yes, it might be a good idea to trade the opposite.
Being able to gauge market sentiment or analyze emotion can be an important tool in your toolbox.
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