Market Sentiment

Market Sentiment
Understanding the Nuances of Crowd Behaviour
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The financial markets are driven by the emotions of millions of traders, making forecasts regarding future price direction. This is why FX market volatility is at its peak in the days leading up to important Central Bank announcements. This is also why some stocks remain overvalued in comparison to company fundamentals, while others remain undervalued.

The collective assumptions of traders or an overall inclination towards a certain side of the trade can drive prices up or down. Bulls remain hopeful that the market will rise and so start buying assets to push prices higher. On the other hand, bears expect the markets to decline, triggering sell-offs and depressing asset prices. The dominant feeling between these two groups dictates the overall trend.

Sentiment traders attempt to capture this market mood for their trading decisions. This can be done through:

  • Technical Analysis
  • Fundamental Analysis

Stay Ahead of Market Moving News Events

TECHNICAL ANALYSIS FOR SENTIMENT TRADERS

A number of market sentiment indicators can help traders gauge how the market feels and where the sentiment is headed:

  • Volatility Index (VIX) – VIX or the “Fear Index” can track implied volatility in option prices, so that traders can protect their positions against sudden reversals. The higher the implied volatility, the greater the “fear” that the current trend will reverse.
  • On Balance Volume (OBV) – This is a technical momentum indicator that uses trade volumes to predict changes in asset prices. It gives an idea regarding the direction in which “smart money” or institutional traders are flocking. An increase in the volume of traders will eventually drive prices upwards.

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Trade the News with FP Markets Economic Calendar

The Economic Calendar is an important tool to stay updated on important news releases and economic indicators. Statements made by country leaders or Central Bank governors can cause a flurry of activity in the market. Traders also evaluate past values of economic indicators, to predict future releases, and be prepared for market volatility. The extent to which the actual figures differ from expectations can set the stage for future trends.

The economic calendar is also an important tool for sentiment traders to avoid low liquidity conditions in the markets, since many traders might close positions during the release of an important report.


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