In this section, we will talk about Market Sentiment.
Sentiment can be best explained by the mood of the market.
As moods of individuals, it can change quickly for many reasons.
The best way to view the market is as the giant living person, as essentially it's made of thousands of people all thinking and feeling and reacting in the same time in their own unique way.
The market is simply the body of feelings thoughts and actions. If you are short term trader then the sentiment is going to be your primary concern when trying to analyse the market and identify trading opportunity.
There are no mechanical rules regarding sentiment and it can last an hour, day or even several months depending on what it is causing it and how relevant market sees that cause.
Interest thing about sentiment is sometimes the reaction to a certain economic event will be quite strong but few weeks later exact the same scenario will hardly even cause the slightest move.
From this point on you may be thinking the sentiment is going to be tricky to deal with but when you understand the concept deeper you will skill and intuition will improve dramatically to the point you will find a straightforward process to identifying sentiment on any given pair or the reason behind the price move.
The concept of sentiment is similar to underlying fundamentals and the most important thing in trading is to identify the reasons why the market is moving in a certain way. but why the underlying fundamentals tell you why is moving in a certain way over the long term, the sentiment tells us why it's moving the certain way in here and now.
And this is why it's so important for day traders and scalpers, no matter what you are trading the first goal should be identifying the sentiment in the market you are active in.
The sentiment is the form of fundamental analysis but short term rather than the big picture.
As we already looked the golden rule of the sentiment is the more something is known the less impact will have on the market and this is something you should always keep in mind when trying to identify the sentiment and the expected market reaction.
Sometimes the market focus on something but then something else happens and the first thing is completely forgotten instantly but on other occasions sentiment will last for weeks and weeks as the market will become more obsessed.
This is a very good reason to always be thinking in the market as living, breathing person, because often market will display strangely human characteristics of fear, greed and irrational behaviour.
This offer means the market will never be 100% predictable but image if you could tell when it's behaving in this manner you would like to avoid this times, wich will stop you wiping off your profits that you worked so hard to generate during good times.
We will spend most times on looking what types of moods market experiences and common reasons why prices are driven in one way or another during a trading session.
The market tends to be made of 2 distinct moves- Risk On and Risk Off.
Risk on is when the market is feeling it want to hunt the profit because there is no risk in the market at this time and they will trade currencies that give them yield or the good return on their money.
So currencies that move a lot, the currencies that have the highest interest rate attached to it will become the most attractive option for investors and traders.
You will very often see this currencies rally during risk on a session.
Risk Off is when the market sees risk and doesn't want to get involved and they become scared and volatility cause losses so they exit trades in big moving pairs and pairs that have high interest and move to safer currencies.
Safe currency is the currency that has the stable political system...
Basically, the safest currencies wich is usually JPY.
When market goes to this safe currencies during risk off times it is known as safe haven flow,
and one of the most extreme moves in the markets is driven by these safe haven flows.
Safe haven flows occurs when a market is worried or scared to move enough capital from risky currencies to safe currencies.
There are several currencies that are known as safe haven currencies at this times
For example, if war breaks out between Russia and Ukraine and threatens to drag in Europe and the US into it then we have a solid safe haven situation.
On the other hand, if it's some conflict reported but markets don't really react we can be sure this is something that will not concern investors too much.
Very often trade is caught because they try to interpret some event but the actual market just doesn't seem to care about.
So when we get safe haven flow wich currencies are most likely to move?
The US Dollar is one of the key safe haven currencies as we already learned its words most liquid and used currency .
The US Dollar is least attractive safe haven currency.
Next currency is CHF, it is extremely active currency during turmoil because its backed by the country that haves stable economy and political neutrality.
The final currency is most popular safe haven currency and gets most flows during difficult times in the market.
The currency we are talking about is JPY.
Another drive in the short term is something called Option Expires
Almost every day we have these option expires on currencies, but how do they move the price of currencies.
Option expire levels, as reported in a news feed, will very often act like a magnet to a price, so if it large option expires like 500 mil this will get market attention and if it's close like within 50 pips you will notice price will be drawn to these option level.
There are also Algos.
Example: when there is the massive unexpected move in price for no clear reason.
This happen regularly and is called fat finger wich means that some trader in a bank or large fund is pressed the wrong button and enter to market with incorrect trade size wich moves the price heavily.
When fat finger enters the market also are ready and they will trade it back to where it was for a nice profit.
The further the price move in a shorther amount of time the greater are chances the price will retrace from that move.
The sentiment is driven by news and events that are driven through the session.
When there is nothing on the calendar then range bound trading happens, this means the price will move in choppy range with no direction.
This is the sentiment that catches most traders.
Traders that focus only on technicals are the ones that fall into that trap.
Most professional traders will either stay out of the market or adjust their trading to range bound price action.
Recognising the sentiment will greatly improve your trading results.
Another market sentiment is Hawks and Dovs as we learned earlier.
These can be fantastic trading opportunities, and you will need to be aware wich member is hawk and wich are dov. Keeping your focus on central banks will also help because this is very rare that other central bank members move the markets with comments in this way.
Another common way that drives the price is related to overall fundamental picture
Option expire levels, as reported in a news feed, will very often act like a magnet to a price, so if it large option expires like 500 mil this will get market attention and if it's close like within 50 pips you will notice price will be drawn to these option level.
There are also Algos.
Example: when there is the massive unexpected move in price for no clear reason.
This happen regularly and is called fat finger wich means that some trader in a bank or large fund is pressed the wrong button and enter to market with incorrect trade size wich moves the price heavily.
When fat finger enters the market also are ready and they will trade it back to where it was for a nice profit.
The further the price move in a shorther amount of time the greater are chances the price will retrace from that move.
The sentiment is driven by news and events that are driven through the session.
When there is nothing on the calendar then range bound trading happens, this means the price will move in choppy range with no direction.
This is the sentiment that catches most traders.
Traders that focus only on technicals are the ones that fall into that trap.
Most professional traders will either stay out of the market or adjust their trading to range bound price action.
Recognising the sentiment will greatly improve your trading results.
Another market sentiment is Hawks and Dovs as we learned earlier.
These can be fantastic trading opportunities, and you will need to be aware wich member is hawk and wich are dov. Keeping your focus on central banks will also help because this is very rare that other central bank members move the markets with comments in this way.
Another common way that drives the price is related to overall fundamental picture
We are talking about Central Bank Policy Divergence.
What this means is that very often traders simply look at currency pair and if there has been the decent pullback from trend then the market will simply start trading the pair in line with central banks.
For example: if the ECB is in the middle of QE program while the FED in a middle of hiking rates then the 2 banks are going in the oposite direction.
This will cause traders to sell the weaker currency and buy the stronger currency.
This traders bet on pair with clear divergence.
One of the common sentiments is the Buy the Rumor and Sell the Fact.
What does this mean?
Buy the rumor, sell the fact occurs when the market is expecting certain outcome and trade with expectation in mind into the event, then as the event is released and occurred, the market abandons the trade and reverses the price action.
For example: imagine that the market is anticipating the bank of Canada will increase their interest rate , speculation starts 2 weeks prior the rate statement and there are been various leaks by the press by the fact that rate hike is happening.
What will happen in this type of scenario is that the price of Canadian dollar will rally as speculator are trying to get in ahead of the event, as the rate statement approaches the market is fully priced in the hike, so the event comes and the bank increases rates as expected but the market begins selling Canadian dollar.
New traders get squeezed out of positions and end up losing money as the price goes opposite way.
So what happened?
They knew rate hike would happen so they start to position themselves ahead of the event, and when the time came they were in good profit and start taking profits rather than risking getting in fresh position.
It is usually seen at the end of large moves or key points.
As we said the more something is known to the market the less impact will have when it happens.
As you can see short term sentiment is vital for you making a profit.
so if you are not tuned in and don't understand what is happening at the moment you will likely get caught out and lose pips, when in reality you should be making them.
Sometimes there will be no news that drives the prices and a market will move in range, but there is something called asset classes.
Asset classes that lead FX are Commodities, Equities, Bonds.
Generally, if it's clear that the market is simply being lead then there will be the very little trading opportunity.
Or you want to take advantage of this moves, but you need to focus closely on assets and the reason why they move.
Volatility is one of the biggest killers of traders.
Next sentiment we have is Stop Hunting and Squeezing
This is simply when we are hunted and played by other market participants.
For example: imagine you entered short position because you have a very good reason, now as you enter a trade you place a stop above the recent highs because if you are right about the trade market should push price lower.
, what happened next is price start to rally sharply against your position breaks the highs, stop you out then the price starts to fall and goes your way.
What happened?
This is called stop hunt or squeeze and it's not anything personal against you,
Image that you work a trading firm and trade in 100mil of size and also think that the price is going to fall however you are so big you can't just click and sell because the price will likely fall meaning you will get very bad price to enter, this results selling where you wanted to take profit wich is not good and terrible way to try to make a profit.
So in order to get at a good price you need extra liquidity, basically you need a poll of buy orders so you can execute your large sell order.
Now as you look at the feeds all these other traders place stop losses just above the recent highs and stop loss are all buy orders and this is what you need in order to take your large trade.
The only problem is its only a few pips from the current price and everyone is positioning to sell, in this scenario because you are a large player you can simply buy the price up to this buy orders and when it reaches them you can execute your large sell order into all of the stops.
This frustrates all traders, and this explains why stop hunt occurs, so think twice where you place your stops, and start to think like a big player when you are entering the market.
Trader Alen
What this means is that very often traders simply look at currency pair and if there has been the decent pullback from trend then the market will simply start trading the pair in line with central banks.
For example: if the ECB is in the middle of QE program while the FED in a middle of hiking rates then the 2 banks are going in the oposite direction.
This will cause traders to sell the weaker currency and buy the stronger currency.
This traders bet on pair with clear divergence.
One of the common sentiments is the Buy the Rumor and Sell the Fact.
What does this mean?
Buy the rumor, sell the fact occurs when the market is expecting certain outcome and trade with expectation in mind into the event, then as the event is released and occurred, the market abandons the trade and reverses the price action.
For example: imagine that the market is anticipating the bank of Canada will increase their interest rate , speculation starts 2 weeks prior the rate statement and there are been various leaks by the press by the fact that rate hike is happening.
What will happen in this type of scenario is that the price of Canadian dollar will rally as speculator are trying to get in ahead of the event, as the rate statement approaches the market is fully priced in the hike, so the event comes and the bank increases rates as expected but the market begins selling Canadian dollar.
New traders get squeezed out of positions and end up losing money as the price goes opposite way.
So what happened?
They knew rate hike would happen so they start to position themselves ahead of the event, and when the time came they were in good profit and start taking profits rather than risking getting in fresh position.
It is usually seen at the end of large moves or key points.
As we said the more something is known to the market the less impact will have when it happens.
As you can see short term sentiment is vital for you making a profit.
so if you are not tuned in and don't understand what is happening at the moment you will likely get caught out and lose pips, when in reality you should be making them.
Sometimes there will be no news that drives the prices and a market will move in range, but there is something called asset classes.
Asset classes that lead FX are Commodities, Equities, Bonds.
Generally, if it's clear that the market is simply being lead then there will be the very little trading opportunity.
Or you want to take advantage of this moves, but you need to focus closely on assets and the reason why they move.
Volatility is one of the biggest killers of traders.
Next sentiment we have is Stop Hunting and Squeezing
This is simply when we are hunted and played by other market participants.
For example: imagine you entered short position because you have a very good reason, now as you enter a trade you place a stop above the recent highs because if you are right about the trade market should push price lower.
, what happened next is price start to rally sharply against your position breaks the highs, stop you out then the price starts to fall and goes your way.
What happened?
This is called stop hunt or squeeze and it's not anything personal against you,
Image that you work a trading firm and trade in 100mil of size and also think that the price is going to fall however you are so big you can't just click and sell because the price will likely fall meaning you will get very bad price to enter, this results selling where you wanted to take profit wich is not good and terrible way to try to make a profit.
So in order to get at a good price you need extra liquidity, basically you need a poll of buy orders so you can execute your large sell order.
Now as you look at the feeds all these other traders place stop losses just above the recent highs and stop loss are all buy orders and this is what you need in order to take your large trade.
The only problem is its only a few pips from the current price and everyone is positioning to sell, in this scenario because you are a large player you can simply buy the price up to this buy orders and when it reaches them you can execute your large sell order into all of the stops.
This frustrates all traders, and this explains why stop hunt occurs, so think twice where you place your stops, and start to think like a big player when you are entering the market.
Trader Alen
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