MARKET SENTIMENT
Market sentiment can be described best as the mood of the market.
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This can change quickly for multiple reasons.
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You should see the market is as a living person because essentially it’s made up of thousands of people all thinking, feeling and reacting at the same time in there own unique way.
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If your a short term trader then sentiment is going to be your primary concern when analysing the markets and trying to identify trading opportunities. It’s important to remember that sentiment can last an hour, day or even months depending on what’s causing it.
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The most important thing is to identify the sentiment and the reasons why it’s moving the way it is. Sentiment is fundamental analysis for the short term.
The markets are made up of two distinct moods and they are: risk on and risk off.
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Risk on is when the markets feels like it wants to hunt a profit, so currency’s that move a lot and currency’s which have a high interest rate attached to them are the most attractive option for investors and traders.
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Risk off is when the market does see a perceived risk and doesn't want to be involved because of the thought of losing money, so they exit trades and enter into traditionally safer currencies. Generally a safe currency is one which has a current account surplus combined with a stable political system and low debt to GDP ratio.
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This is know as a safe haven flow, this is when the central banks are worried or concerned about something enough to pull it’s capital away from the currencies perceived as risky and into those currencies perceived as safe. Those safe haven flow currency’s will generally increase during these times of risk off and these currencies have to be one which is backed by secure economy and reasonable debt level. For this safe haven flow to be active there must be something worrying in the news which is also being reported in the financial news.
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For example the Swiss Franc is one of those safe currencies to move your capital into in these times of panic. This is because it’s backed by a country which has a stable economy, a low debt to GDP ratio and a long history of political neutrality.
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Another safe haven would be the Japanese Yen.
What causes the market sentiment to change?
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Options Expires
The option expiry level as they are reported will act as a magnet to the current price. So they will move price in the short term and are well worth marking on your charts from the news feeds
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Algorithmic traders
The further price moves in a shorter amount of time without solid fundamental backing the highly the probability that price will snap back to the organically price due to those algorithm traders or systems.
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Corporate Demand
Corporate demand is something which can push the market in a particular direction over
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the short term. This can be when a company buys another company in a different country and in order to do this they will have to exchange there currency for that other particular currency.
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The bias of Hawks and Doves
The language of governors’ in their speeches can change the long term fundamental picture, this can also have an affect on the short term sentiment too. We are looking for known doves or hawks changing there usual bias to indicate that there is going to be a change to follow. When doing this keep your focus on the main central banks because it’s these governors which are likely to move the markets with what they say.
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Central bank policy divergence
This is when both banks are literally going in the opposite direction, one bank is cutting it’s rate and one bank is raising it’s interest rate. Traders literally buy the stronger currency and sell the weaker currency. Both banks must be going in the opposite direction, this can happen at any time and generally lasts the whole session.
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Buy the rumour and sell the facts
This occurs when the markets’ expect a certain outcome and trade with that expectation in mind into the event. As the effect is released or occurs the market abandons the trade and reverses back in the opposite direction.
The golden rule to sentiment, the more something is already known to the market the less impact it will have when it happens.
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This is why central bank’s try so hard to play with their language and statements in order to let the markets know about any upcoming policy changes as early as possible.
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By doing this it keeps prices stable which is one of their most important tasks.
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Just because you have established what the sentiment is doesn't mean you should just trade it, sometimes sentiment can give you the very reason why you shouldn't be trading and stay out of the market.
Volatility is one of the biggest killers for traders, during these times the most inexperienced traders will lose all their hard earned profits and even blow their accounts it’s so important that you identify these periods and stay away from them.
Stop Hunting Is a very annoying form of sentiment
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This is when we are hunted and played by other market participants and can fell like the market it literally out to get you. It’s when big investors drive the price back into the opposite direction for an even better entry on the trade but by doing this the price hits your stop loss and knocks you out the trade. Price then proceeds back to where you initially predicted it would go, but you are no longer in the trade. Being aware of this will make you think twice of where you place your stops.
Sentiment also gives us that initial hint on the next big fundamental change, which gives you the opportunity to enter a position early or setup your technicals before everyone else, making you one step ahead. If the news and figures coming out are getting progressively worse and you notice the short term sentiment changing you are straight away at an advantage and get into the trade far quicker than the average investor and retail trader.
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We establish sentiment in the same way we establish the fundamental focus and analysis, research. We have covered the websites and sources which you should use continuously to help with your trading; one being fxtsreet whereby you can quickly find out what the sentiment is for any given currency. Focus on reliable sources backed with the reasons why. The more analysts saying the same thing, the better. Don't get too caught up on market sentiment but make sure you do your research before you trade.