Forex Market Sentiment Indicators

Forex Market Sentiment Indicators

Forex Market Sentiment Indicators

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Forex Market Sentiment

With billions of dollars' worth of forex transactions placed every single day it is clear that there are many participants in the forex market.

With such a large volume of trades taking place and the majority of them being speculative, it is very important to have an edge when trading the forex market.

Fundamental analysis can give an overview of a currency pair's direction and technical analysis can help to spot trends and reversals.

The key thing missing is one of the most important aspects for any trading strategy which is market sentiment analysis.

Market sentiment analysis will show you how many traders are in a long position, how many traders are in a short position and the volume of these positions.

When you know what the majority of traders positions are and the amount of volume of these positions, you know what the overall sentiment is. As Forex Market Sentiment Indicator user Mirko says, "This indicator is not far to the holy grail, Thanks"!

The Forex Sentiment Indicator will show you the amount of traders who are long or short and the amount of trading volume in these positions.

The indicator is developed for MetaTrader 4 and visually displays the market sentiment data of multiple currency pairs on one chart. With this data you can look for extreme conditions for contrarian trading signals.

The Forex Sentiment Indicator can be used stand alone or combined with any other technical and fundamental analysis. It is one piece of the puzzle to analysing the market.

The Forex Sentiment Indicator uses data collected in real time from MyFxBook which has a database with thousands of forex traders who are actively trading on real accounts. The combined trading volume of these traders is in the billions. This gives very strong data to conduct a thorough and accurate up-to-date forex market sentiment analysis with the Forex Sentiment Indicator.

Sentiment Indicators

Sentiment indicators show the percentage, or raw data, of how many trades or traders have taken a particular position in a currency pair. For example, assume there are 100 traders trading a currency pair; if 60 of them are long and 40 are short, then 60% of traders are long on the currency pair.

When the percentage of trades or traders in one position reaches an extreme level, sentiment indicators become very useful. Assume our aforementioned currency pair continues to rise, and eventually 90 of the 100 traders are long (10 are short); there are very few traders left to keep pushing the trend up. Sentiment indicates it is time to begin watching for a price reversal. When the price moves lower and shows a signal it has topped, the sentiment trader enters short, assuming that those who are long will need to sell in order to avoid further losses as the price falls.

Sentiment indicators are not exact buy or sell signals. Wait for the price to confirm the reversal before acting on sentiment signals. Currencies can stay at extreme levels for long periods of time, and a reversal may not materialize immediately.

"Extreme levels" will vary from pair to pair. If the price of a currency pair has historically reversed when buying reaches 75%, when the number of longs reaches that level again, it is likely the pair is at an extreme, and you should watch for signs of a price reversal. If another pair has historically reversed when about 85% of traders are short, then you will watch for a reversal at or before this percentage level.

Sentiment indicators come in different forms and from different sources. One is not necessarily better than another, and they can be used in conjunction with one another or specific strategies can be tailored to the information you find easiest to interpret.

Commitment of Traders Reports

A popular tool used by futures traders is also applicable to spot forex traders. The Commitment of Traders (COT) is released every Friday by the Commodity Futures Trading Commission. The data is based on positions held as of the preceding Tuesday, which means the data is not real-time, but it's still useful.

Interpreting the actual publications released by the Commodity Futures Trading Commission can be confusing, and somewhat of an art. Therefore, charting the data and interpreting the levels shown is an easier way to gauge sentiment via the COT reports.

Barchart.com provides an easy way to chart COT data along with a particular futures price chart. The chart below shows the Daily Continuous Euro FX (December, 2012) futures contract with a Commitment of Traders Line Chart indicator added. The COT data is not displayed as a percentage of the number of traders short or long, but rather as the number of contracts that are short/long