What Does Sentiment Analysis Mean?

I

t means exactly what its name is - a sentiment/opinion/feeling of the traders for the direction of movement in the market.

Until now we tried our best to make you understand that the price action represents all the market information – the history of how the price changed, the economical and political factors that influence it etc. 

BREAKING NEWS! It is only partially true. If it was like that, all traders would have reacted the same way to the change in the currency prices. 

Forex Sentiment Analysis

It defines how traders feel about the particular market.

What is specific about such analysis is that it is based on each trader’s opinion of why the market is acting the way it does and decide whether they want to trade in the same direction of the market or against it.

You have different tools such as sentiment indicators, which are graphical indicators showing how a group of people feel about the market. 

You could also simply watch the movement of the markets and use the gathered information to make your decisions.

The overall attitude of the market whether it is positive or negative is related to the sentiment of the traders. 

As such, traders use sentiment analysis to determine if the market is bullish or bearish.

Bear’s market is characterized by assets going down, and a bull’s market by prices going up. 

Traders can be funny, huh? Bear and Bull, who could think of such hairy not very beautiful animals. 

Why not Swan and Eagle? Ah yes, cause we are not some ballerinas from Swan Lake or guitarists from Eagles. On the contrary, we are BIG and STRONG traders!

Unfortunately, we can’t move the market in our favour just because our sentiment says so. 

That’s why if you truly believe that the euro is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it.

It is alllll about spotting traders’ positions, to ultimately understand how they are thinking, and how to take advantage of it. More like observing something before you start to gossip about it. 

As a trader, you have to take all this into consideration.

Then you have to decide whether you want to incorporate your perception of market sentiment into your trading strategy or ignore it. 

By ignoring it, you could use the sentiment analysis as a contrarian indicator.

Why is that?

For example, when the crowds start to either buy or sell a specific currency pair, other traders are observing the market movement and decide to take a position in the opposite direction of sentiment.Boom! Revolution! 

For example, if everyone is bullish EUR/USD, then it might be time to go short.

Knowing that between 70-80% of retail traders lose money, you might not want to bet your money as others losers do. 

That’s why sometimes it could be a good idea to do the opposite of what they do!

But to do so, first, you need to be able to fully analyse the sentiment on the market.

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