One way of understanding the market sentiment is simply to observe how the market is performing. For example, let’s say you are trading EUR/USD based on a continuation pattern around a big event risk. The pair has been selling off for two days, and you also have a short position. You are getting close to the event risk, but the currency pair is not falling enough to reach your target, and it is consolidating. This shows that the momentum is not on your side, and you may consider getting off your trade.According to Jamie Saettele, author of Sentiment in the Forex Market, “Crowds move markets and at major market turning points, the crowds are almost always wrong. When crowd sentiment is overwhelmingly positive or overwhelmingly negative—it’s a signal that the trend is exhausted and the market is ready to move powerfully in the opposite direction. Sentiment has long been a tool used by equity, futures, and options traders.”
In my opinion, the technical indicators can sometimes also help us understand the market sentiment. Heck, the indicators and patterns were developed (and invented) by observing the habits of the traders that repeat themselves over and over again in any charted market, such as those for stocks, bonds, and commodities. Most of the time, we can use the same indicators in the forex market.
Mr. Elliot was one of the market observers who discovered the underling social principals and developed and analytical tool called Elliot Waves. Watch the next Coffee Break video to get introduced to Mr. Ralph Nelson Elliott and his wave theory.
