To consistently turn a profit as a forex trader, your trading strategy can’t only rely on economic calendars and technical indicators to identify trading opportunities as they develop.
Because forex trading is highly speculative, the sentiments of the overall forex market can be highly influential on the valuation of certain currencies—which means overall trader sentiments can actually move the prices of positions you’ve been targeting.
Understanding the impact of currency pair sentiment on forex prices is a crucial component of any winning forex trading strategy. The better you’re able to understand these sentiments through the quantified tools and resources available to forex traders, the more effectively you will be able to make timely trades that leverage sentiment with other analyses to better predict price movements and profit opportunities.
What is currency pair sentiment, and why should forex traders care?
Just as traders develop bullish or bearish attitudes about the forex market as a whole, traders also become bullish or bearish about the valuations and price movements of individual currency pairs.
Currency pair sentiment is a term that reflects the overall feelings of forex traders regarding a specific currency pair. Often, these sentiments are filtered through the trading activity on a single platform, such as a forex brokerage firm. When traders become more encouraged about the future price movement of a currency pair—especially in relation to its current price—traders may become more upbeat and push that overall sentiment higher.
The same is true when traders become pessimistic about a pair’s value. To some degree, these sentiments can be a self-fulfilling prophecy. If traders become deeply positive or negative about a currency pair, their own trading activity can push the value of that pairing higher or lower. The influence of sentiment on forex prices is reason enough for traders to monitor these attitudes and plan out trades accordingly, but the value of these sentiments is further strengthened by the fact that overall market optimism or pessimism is likely based on concrete data points and/or indicators.
How do you analyze currency pair sentiment?
Fortunately for forex traders, similar data points and indicators can be used to better understand the overall sentiments traders share for a particular currency pair. As you assess those sentiments and seek out promising trade opportunities, here are some key data points and categories to consider when poring over brokerage listings and real-time reports for any forex currency pair.
Support and Resistance
Lines of support and resistance are identifiable price levels where traders anticipate a currency pair’s price movement slowing down and possibly reversing course. These lines of support and resistance may be informed by existing chart activity, such as range-bound price movements, and/or they could be informed by Fibonacci levels.
These lines can have a strong correlation to trader sentiments regarding a specific currency pair—especially in cases where traders are preemptively planning trades based on expectations that prices will reverse course. This can sometimes be a case of shifting sentiments becoming a self-fulfilling prophecy.
In forex trading, pivot points are used to identify possible price levels and positions where prices for a currency pair may change direction. These pivot points also correspond to changes in market sentiment—particularly when informed by lines of resistance and support—or other trends based on momentum and other trends shaping price activity.
A number of basic calculations are used to identify possible pivot points using lines of support and resistance. It’s important for traders to remember that these calculations are intended to identify possible pivots for the purposes of planning trades that will leverage changing sentiments to capture a profit.
Futures Open Interest
Futures open interest refers to the derivatives contracts that remain open for a given currency pair. The volume of these contracts can reflect the strength of currency pair sentiments and be used to identify potential entry and exit opportunities.
Increasing open interest suggests that prices may continue to move higher or could pivot and turn higher soon. If the open interest starts to decline, for example, it could signal that the trend’s momentum is slowing and that trader sentiments are starting to turn in the other direction.
Broker Sentiment Reports
Individual forex brokers sometimes publish reports on the sentiments of traders using their platforms. By presenting regular updates on the proportions of long and short positions, traders can quickly get a pulse of overall currency pair sentiments for traders on a specific platform.
Use currency pair sentiment alongside other forex analysis.
Like any other data point or approach to analysis, currency pair sentiment can be very helpful in identifying potential trades—but it also isn’t foolproof. Trader sentiments are just as prone to miscalculation as any other indicator or data point, particularly when those signs are all pointing in the wrong direction.
Similarly, traders can have a habit of getting overenthusiastic—or overly negative—about specific currency pairs, which can lead to false signals for traders overly reliant on sentiment. New economic news and other factors can also change the outlook for currency pairs dramatically, causing abrupt changes in sentiment that could trigger steep losses in a short period of time.
The best approach to leveraging currency pair sentiment is to combine this method of trade analysis with chart patterns, technical indicators, and other types of research that will validate the signals those sentiments are sending. By validating these signals across multiple forms of analysis, you can have more confidence in the accuracy and strength of those sentiments—and plan out your forex positions accordingly.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.