There are three types of market analysis in forex trading: technical analysis, fundamental analysis, and sentiment analysis. Technical analysis is the main framework and study that traders use for determining the price movement where analysts and traders eat and breathe on charts. We also have the fundamental analysis that studies politics, economics, and social aspects that we can use to further understand price and movements. We have the third one, which the sentiment analysis that focuses more on the way the traders feel about specific currency pairs. This article will explain sentiment analysis further.
What is sentiment analysis?
People’s views about different currency pairs may be subjective since they have different thoughts and insights. After all, currencies come from other countries.
In theory, some people say that price action reflects all the things we know about the market. However, it is not that simple in forex trading because the forex market does not reflect every information, and traders will only act similarly. It is not how it works since forex traders have their own views on how the market moves and acts. Forex traders have their own will to trade either in the same direction the market moves or against it. Now, we slowly understand how essential sentiment analysis is, hence its given name sentiment. People’s sentiments are not always the same.
The market and sentiment analysis
The forex market is a collaborative representation of every person’s opinion or sentiment about it. The root starts from a single trader who takes a position based on how he or she feels about this specific currency. Suppose we collect all of the trader’s sentiment. In that case, we can come up with an overall conclusion about everyone’s sentiment about the market without considering all information given like charts, news headlines, and reports, etc.
So, it means that even if you feel extra optimistic about a single currency. Still, everybody, or at least the majority, feels exceptionally negative about it; you cannot help it. You will need to listen to the sentiment analysis since you can only do so much and cannot move the market in your favor as a single retail trader. You need to perform a sentiment analysis about the market if it is bullish or bearish.
You against the overall market sentiment
There are two things that you can do if you feel different about the market. First, you can simply ignore it. But if we think about it, sentiment analysis is there for a reason, and there is no excuse you should not use it as an advantage!
The other option is to use it as a contrarian indicator. A contrarian indicator suggests going against what everybody thinks. For example, going short on a currency pair when everybody thinks it is bullish. Also, some statistics say that 70-80% of retail traders lose, and knowing that they are wrong and in a long position can give you an advantage by going in the opposing direction. Sentiment analysis also means power when you know how to play with it. All the best!