Learn Forex Trading Sentiment Indicators

Learn Forex Trading Sentiment Indicators

One of the tools that you have to know about when you trade forex is market sentiment indicators.  It is important that you understand what these tools have to offer when you learn forex trading.  Many traders believe that these indicators can give you an edge with your trading if you use them correctly.  There are some trading platforms that include market sentiment indicators, but you should know other methods as well.

Sentiment Indicators

When you use a sentiment indicator you will be given data in percentages.  These percentages are the number of traders that are trading a currency pair in one way.  You will only be shown the highest percentage to indicate which way the market is heading.  It is important that you keep an eye on the sentiment because extreme levels are important.

When the market sentiment reaches extreme levels you know it is time to act. When the trader sentiment is very high you no longer have a high number of traders pushing the trend.  At these times the trend will move into overbought or oversold areas.  When this happens the trend will either stabilise or reverse.  You need to combine the trader sentiment with technical analysis to determine what the market may do at these times.

Of course, sentiment indicators are not signals for you to buy or sell.  Most traders view them as a starting point for their analysis of the market.  If you see that more traders are selling then you should try and find out why.  You should also realise that the extreme trader levels will vary from currency pair to currency pair.  Some pairs have to reach 90% for it to be considered extreme while others will turn at 70%.

Learn Forex Trading with the COT Report

If you are not going to be using a market sentiment toll then you should know where else you can look to find out what traders are doing.  This is harder to do with the forex market because there is no physical exchange that can keep track of data.  However, there is the COT report which is the Commodity Futures Trading Commission report.  This lists all the open futures on the forex market.

The information on the market is not what traders on the spot market are doing, but it is close enough to give an accurate portrayal of market sentiment.  Many traders view the COT report as too complex to be easily used in a trading plan.  If you are going to use the COT report you need to learn about what to look for and how this actually translates to the forex market sentiment.

Broker Position Summary

In an effort to appear more transparent forex broker have taken to releasing aggregated percentages of the trades that are being done.  Like the COT report these summaries are only of open trades which are what you need for market sentiment.  The information from these summaries is not considered as reliable as the COT report.  The main reason for this is that the data comes from the open trades for that broker only.  This is only a fraction of the entire market and could skew the actual market sentiment.

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