How Analysing Market Sentiment Could Give You An Additional Edge

Market sentiment is a term to describe the overall feelings and risk appetite of market participants. A simple example would be: Rising prices generally indicate bullish market sentiment, while a decline could signal that we are in a bearish market environment, and that investors are risk averse.

It is not necessarily based on fundamentals. For example: If the S&P 500 drops below a major psychological support level, it could influence market sentiment somewhat. It could also be an important chart pattern, such as a break above/below the 200-day moving average.

Some traders prefer to follow the trend – meaning bullish sentiment would be a reason for them to buy and ride the trend. Meanwhile, contrarians are looking for an overly bullish or overly bearish market, in order to enter a position in the opposite direction.

Sentiment is not something that can be measured by numbers, and there is no correct or accurate way to measure it. When markets are choppy, some traders might even consider that sentiment is bullish, while others consider it to be bearish.

Incorporating market sentiment into your trading could prove to be helpful. It should not be used on its own, but it can provide additional information and assist in the decision-making process. Let us find out which tools could help you determining the market sentiment.

Positioning

The Commodity Futures Trading Commission (CFTC) publishes a weekly Commitments of Trader (COT) report that provides a breakdown of the net positions that large speculators have in various asset classes. While volumes in FX Futures are by far not as big as the volumes in FX Spot, it is still relevant as the data reflects the positioning of large market participants. Furthermore, the FX Spot market is decentralized, so the COT report gives us at least some insights into speculative positioning.

Volatility

Another way to measure market sentiment are market volatility indicators. A popular index that many traders follow is the VIX.  The VIX (also known as market's "fear gauge") is based on real-time prices of options on the S&P 500 and is meant to reflect investors' consensus view of future expected stock market volatility (30 days). It is important to note, that a high VIX value does not mean that market conditions are bearish. High volatility can be present in a bull market as well. However, looking at the VIX chart, it is noticeable that higher volatility usually means higher uncertainty, which can lead to risk aversion.

VIX
VIX

AxiTrader Sentiment Indicator

The Sentiment Indicator gives you the opportunity to gain insights into live market trends by viewing how others are trading. The indicator comes with the AxiTrader MT4 NexGen package, which is available free of charge if you have an AxiTrader live account.

Sentiment Indicator
Sentiment Indicator

PsyQuation

The Order Flow Sentiment Indicator (OFSI) gives you comprehensive insights into the current behaviour of tens of thousands of active traders:

  • See the order flow of more than 24,000 live trading accounts
  • Customised filters let you segment the order flow based on underlying trader performance
  • Order flow is updated every hour
  • Get the OFSi table and historic indicator updating with an EA in your MT4 terminal
OFSI
OFSI

How to get it? It is free of charge, if you open an account with AxiTrader and connect it to PsyQuation! 

Conclusion

There are plenty of different sentiment indicators and many ways to interpret them. They can provide valuable insights and help in the decision-making process, but it is important to use them as tools to enhance your existing trading strategy, and not as standalone indicators.

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