Sentiment analysis is a technique for determining how other traders feel about a certain currency pair.
We previously stated that price behavior should ideally represent all market data. Unfortunately, it isn’t that easy for us, forex traders.
Since traders would not behave in the same way, the forex markets do not simply represent all of the information available. Of course, that isn’t how things work.
It is for this reason that sentiment analysis is important. Each trader has their own take on why the market behaves the way it does and whether they should trade in the market’s direction or against it.
The market is similar to Facebook in that it is a dynamic network of people who want to spam our news feeds.
Aside from the joking, the market is essentially a representation of how all merchants, like you, Warren Buffet, and Celine from the donut shop, feel about the market.
Regardless of what information is available, each trader’s thoughts and opinions, which are conveyed by whatever position they take, contribute to the overall sentiment of the market.
The problem is that, no matter how passionate you are about a particular deal, you can’t sway the forex markets in your favor as a retail trader.
Even if you think the dollar will rise, but everyone else believes it will fall, there isn’t anything you can do (unless you’re one of the GSs – George Soros or Goldman Sachs!). As a businessman, you must take all of this into account. You must do a sentiment survey.
It is your responsibility to determine whether the market is bullish or bearish.After that, you must determine how you can integrate your market sentiment perception into your trading strategy.
It’s entirely up to you if you want to disregard consumer sentiment. But, hey, we’re telling you right now: it’s all your fault!
The use of sentiment analysis as a contrarian measure is common.There are a few theories as to why this is.One theory behind this is that if Everybody (or nearly everyone) has the SAME sentiment, it’s time to go hipster and trade against it.
If everybody and their mother is bullish on EUR/USD, for example, it might be time to go short. What is the reason for this? You’ll have to go a little farther down the School to find out! Oh, my goodness!
Another theory is that the majority of retail forex traders are (unfortunately) inept. According to estimates, between 70 and 80 percent of retail traders lose money, depending on where you look.
So, if you know that all of these unprofitable traders who are normally wrong are all long EUR/USD right now, well, theeeeen. Doing the polar opposite of what they do could be a smart idea!
Sentiment analysis, or the ability to gauge investor sentiment, is a useful method to have in your toolbox. Later in training, we’ll teach you how to use Jedi mind tricks to evaluate market sentiment and use it to your advantage.
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