Market Sentiment Analysis in Forex Trading

We’ve previously mentioned that prices should, in theory, reflect all available market information accurately. Unfortunately for traders, reality is far more complicated—the market doesn’t simply mirror every piece of data.

Every trader has their own interpretation of market movements. The market is like Facebook: a complex network space composed of countless individuals.

Ironically, what the market reflects is the collective feeling of all traders. Each trader’s views and opinions are expressed through their open positions, collectively shaping overall market sentiment.

Here’s the catch: As an individual trader, no matter how strong your conviction about a trade might be, you can’t single-handedly change the market’s direction (unless you’re Goldman Sachs or Soros). Even if you’re utterly convinced the USD will rise, you’ll be powerless if the rest of the market is bearish on the dollar.

As a trader, you must account for all factors. Determining whether the market is bullish or bearish—and gauging its sentiment—is your responsibility. Ultimately, the choice to align with or ignore market sentiment is yours. But let us be clear: Ignoring it may come at your own expense.

The ability to measure market sentiment is a critical tool in your forex trading toolkit. In later lessons, we’ll teach you how to analyze sentiment and use it to guide your trades.