Market sentiment is simply what the majority of the market is perceived to be thinking or feeling about the market - it is the most important factor that drives the currency market. This is so because traders tend to act based on what they feel and think of certain currencies, regarding their strength or weakness relative to other currencies. I will assume that when you trade currencies, you don't blindfold yourself to simply pick any pair to buy or sell, leaving it to randomness to determine your profit/loss statement at the end of the day or month.
Market sentiment sums up the overall dominating emotion of the majority of the market participants, and explains the current actions of the market, as well as the future course of actions of the market. The trend adopted by the Forex market is actually a reflection of the current market sentiment, which in turn guides the trading decisions of other traders, whether they should long or short a currency pair. In the process of making educated trading decisions, traders have to weigh a multitude of factors which could influence the bias of a currency, before making up their minds about the current and future state of certain currencies. One thing to note is that market sentiment is not logical; it is primarily based on traders' emotions, which is really one of the greatest, if not the greatest, factor in the determination of a currency exchange rate.
There are three main types of sentiment when it comes to forming opinions in the Forex market: bullish,
bearish or just plain confused.
If the majority of the market wants to sell that currency, the market sentiment is deemed to be bearish; if the majority wants to buy that currency, the market sentiment is bullish; and when most market participants are unsure of what to do at the moment, the sentiment ends up being mixed. Since the US dollar is the currency on the opposite side of 80% of all foreign exchange transactions, most traders will be concerned with what the market thinks about the US dollar. Currency prices simply embody the market's perceptions of reality and the sum total of traders' emotions.
Market sentiment acts like a fickle lover, capable of changing its mind based on certain incoming new information which can upset the existing sentiment. One moment everyone could be buying the US dollar in anticipation of a stronger dollar; the next second they could all be dumping it as they fear the dollar would start to weaken due to the impact of some new piece of information, which is almost always some fundamental news.
Understanding the current market sentiment and exploiting it appropriately with the other strategies being taught in Instant FX Profits can help maximise your trading profits, because if you can guess what the other market players are thinking about, and understand why the market is doing what it is doing, you will be in a better position to plan your entry and exit points and timing.
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