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Sentiment Trading Strategy

Sentiment trading strategy uses the sentiment of global traders to reach a highly probable trading decision. Millions of traders have their own opinions (or sentiment) about a currency to be bull or bear at a certain moment. Collective opinion of them can be used as a reliable signal in Forex trading.

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Sentiment Trading Strategy

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  1. 17.SentimentTradingStrategy 17.1WhatIsTradersSentiment? One of the most influential factors in financial markets including Forex is supply-demand pressure (or buyers- sellerspressure).InForex,asasparsemarket,wearenot abletomeasurethisfactorinrealtime,butfortunately,a verycloseestimationofitisinhandthatiscalledsentiment. Sentiment,asitisunderstandablefromthewordisthefeel oropinionofthetradersaboutthemarket.Inagiventime,a partofthetraderssensethemarketasbullishandtendto openlongpositionsandtheotherpartsensethemarketas bearish and tend to open short positions. This game is repeatedallthetimeandtheoppositesentimentsofthe massesactasaconsiderablesupply-demandforce.So,the trick is to look at the sentiment charts and follow the dominantgroup. Figure17.1.1Bull/bearsentimentevolvement 51

  2. Ifthishistoricalsentimentisnotvalidatthecurrenttime(i.e. the chart shows 54% long sentiment but the market is steeplybearish)wecannotsaythatthemassthinkorsense bullishatthemoment(andsurelytheydon’t).So,howwork aroundthiscomplexity?Theansweristoconsidersentiment evolutionorchangeduringthemostrecenthours.Letme explainthiswithanexample.Supposethatthesentiment chartreads60%:40%long:shortat12GMT.Ifthreehours laterthechartreads63%:37%long:shortweconcludethat themarketsentimenthasevolved3%forlong.This3% long evolvement reflects the most recent mass opinion aboutthemarketandalsothemostvalidsentimentwecan obtain.So,thislaterfigure(3%)isthegoldennumberthat works for us and should be considered in our trading decision.3%changemaynotlooksmuchbutifyounotice thatforexampleOandaconsistsoftensofthousandsof traders, this 3% evolvement is quite enough to show a significantchangeinsentiment.Assuchbigbrokershavea big community of traders, we can see them as representativeoftheworldwideForexcommunityandtheir opinionasvalidasthewholeworldwidetraders.Alwaysbear inmindthatcrowdsentimentisnotvalid(toshowtheprice direction)anddoesnotaffectthemarketdecisionsallthe times. Look at it only as a complementary signal in combinationtoothertradingsignals(chartpatterns,price rejectionetc.)toincreasethewinningrateofyourtrading. 53

  3. Figure17.2.1Traderssentimentasaleadingsignal Figure17.2.2Asentimenttradingopportunity 54

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