What is Sentiment in The Forex Market


This article is the first in a series by Mani Mosheni. You can follow Mani’s trade ideas on twitter.

Sentiment Articles —> (1 | 2 | 3 | 4 | 5) And you can check out our weekly COT Reports here.


All of us know this fact that “If you want to trade successfully in the Forex market you need to have a plan”. I want to say that a successful plan is not as simple as buying and selling when an indicator goes oversold or overbought.
You might saw some economic indicators releases that were absolutely negative for a currency but that currency went up or vice verse (this fact can be seen for the EURO zone last 2 months), so I will show you later that Fundamentals is not exactly trading news and economic indicators.
There is something strange among Technical and Fundamental analysis and it is “Sentiment”.

Price and candlestick patterns that occurred 100 years ago are likely to occur now and in the future. We are the market movers and how we are thinking will never change even if the participants change, our brain’s nature will not change.

Following the crowd is one of the reasons of human growth and even if the crowd is doing wrong we feel safer as part of a crowd. It’s much easier to be wrong in a crowd than be wrong by yourself.


Sentiment is something about the crowd and herding process in human nature.
“All economic movements, by their very nature, are motivated by crowd psychology.”

So what if we find a way to catch gooses that lay golden eggs?
There are two approaches here, one for fundamental analysis and one for technical.
In both of them you have to follow that successful market movers, you have to see what they see and what to do what they are going to do.
I wrote a sentence at the beginning of my article and it was “a successful plan is not as simple as buying and selling when an indicator goes oversold or overbought.” Now I’m going to explain it:
Assume that your plan is to trade oversold and overbought opportunities with stochastic or RSI, stochastic is now overbought and you want to go short because your plan is telling this, so you went short and got stopped out as market went up further. So what’s the reason? Do you ever think about this?
I know the reason! It’s about crowd! Because all of the market participants are not using stochastic and are not watching it in their charts!
It’s the same in fundamental analysis; news releases can bring you some pips early after the news release but it is not going to change the direction of a trend. Remember that news trading is NOT fundamental analysis! Fundamentals involve many intricate factors that are very hard to understand for us and so it’s hard for a major group of participants in the market.

Now let’s have a brief look at our brain’s nature:
Our brain has got three parts: R-Complex, Limbic system and Neocortex.
R-Complex is the part that we share with animals, Limbic system is found only in mammals and controls emotions such as feeding and herding, Neocortex is found only in humans and it’s the rational part of our brain.
Scientific researches show us that limbic system works faster than Neocortex and absolutely it’s the reason of why we can’t decide sometimes correctly.
Wisdom and emotions! What do you think about them?
So when we haven’t got adequate knowledge in anything like Forex then we are going to emotionally follow other participants and this behavior leads to the creation of a crowd.

As a result of this laconic article I want to say that “Herding behavior rules in the financial speculation and I proved that emotions are the reason of such behavior”

I’m going to use this sentence and entire discussion for the second part of this article which is more important and absolutely it’s awesome.

Regards

Mani Mohseni

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  • Anonymous

    Hi Michele, Thanks for your great comment. I want to say that toping action is an effect of market extremes and sideways comes from closeness of Commercials and Noncommercials contracts to each other, you should read all sentiment series articles. So everything in this market is related to movers sentiment. You are predicting the market now with saying ” Look for a rally to the half way mark from this recent low and then down we go” predicting the market is not recommended to everyone, you have to analyze the market not predicting it, but that sentence showed your sentiment! So how did you say that Market sentiment will play apart? you are one of the market movers and you have a sentiment!

    I appreciate your comment and looking forward to hear more about you and your opinions.

  • Michele Davies

    Hello

    If you are a Dow theorist the chart of EURUSD could be behaving like a broadening top formation . The unrealistic highs and then skiddish lows.Market sentiment will definitely play apart. Look for a rally to the half way mark from this recent low and then down we go..because all that bought up top need to get out.

  • Thanks Reikiportal.

  • Clement

    Thanks. I now can see why this market goes crazy atimes.

  • Reikiportal

    good konwldege for right trade…thx

  • Thanks Gaby for your comment,
    I’ve worked with overbought and oversold levels for many years, Sentiment of this levels were to short overbought and long oversold in the past, but nowadays sentiment of market movers has changed and now when a pair goes through these levels is more likely to continue it’s way.It’s look like a doji, a doji indicates that price is struggling to continue its way and it’s not a reversal pattern untill we have a confirmation.
    I’m about to show you some great information on finding these sentiments and use them in our tehchnical analysis.

    Regards

  • Schiszler Gabriella

    Hi!

    Thank you for your insight into sentiment . It gave me a good explanation of why many times stochastic does not work the way it suppose to. Many times it happened to me that I missed out on a trading opportunity cause the stochastic was already overbought, and I missed out on a lot of pips. I always wondered what might have been the reason. Now I now.
    Anyway , during many years of trading I have learned that friend is Your Best Friend so I only look for entries with the direction of the actual trend.

    Thank you for your dedicated and helpful work

    Regards
    Gaby