What is Forex market sentiment? Find out how the mood of the market can help you have profitable trading

Forex market sentiment teaches you to treat the market as a person. Watch our latest video to find out who came up with this idea, and why is it so helpful in trading!

What is Forex market sentiment? Trade safely and wisely

Trading market sentiment. You may have come across the term “market sentiment”. And you may be wondering, what is the market sentiment? Thankfully, it is an easy term to understand as it simply means, the mood of the market. Now, it is going to help you in your trading, if you start to think of the market as a person.

This concept of the market as a person is drawn from a book by Benjamin Franklin called, The Intelligent Investor. In that book, he describes the market as a person, “Mr. Market”. In a way, this is a fair reflection, since the market, as a whole, is simply a reflection of many thousands of individuals. Now, every day, Mr. Market will offer you a price to trade with. The problem is Mr. Market has emotional problems and that is reflected in his price. Some days he’s manically depressive, other days he’s euphoric. Day after day, he is there, offering you a price to trade with. Your responsibility is to try to take advantage of his huge mood swings. Sometimes, he will be overly euphoric, and other times overly pessimistic. Now, these times may offer you opportunities to trade. However, you also have the option to ignore Mr. Market, if he’s behaving irrationally. Now, the key thing to grasp is that you use the market as a servant and not as a master. So if Mr. Market turns up, one day, in a very foolish mood and you allow that to influence you, then you’re in trouble. Sometimes, Mr. Market will ignore significant data or fundamental analysis, but sooner or later, he can’t. And there’s a great quote of Benjamin Franklin, that’s well worth remembering, as a guide to the market, because what Benjamin Franklin said, he said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” It’s well worth pondering that phrase of Benjamin Franklin’s.

So, Market Sentiment is essentially the mood of Mr. Market on any given day. So, think about the market as a bit of a moody business partner. Every day you have to assess what kind of mood he’s in, and I’m sure we can all relate to people we know who’s mood we have to watch very carefully as it’s prone to wild swings. This is what Mr. Market is like, and understanding his mood is a key to understanding sentiment. Every session, the market will have a mood or a sentiment. And the sentiment can even change throughout the session. The sentiment could be risk-off in the Asian session but then risk-on, in the London session. Every day the market is digesting information from all around the world and that’s affecting the mood or sentiment of the market. So, your job as an investor is to know the market sentiment every time you approach the market, it is so important! If you don’t know the market sentiment, you can’t really expect to succeed in the financial markets. Let me repeat that. If you don’t know the market sentiment then you can’t really expect to succeed in the financial markets.

For example, if you’re looking to sell the Yen in a heavy risk-off environment, you are going to lose your trade. If you simply knew the sentiment for that day, you would have known to avoid that trade, since the Yen is bought in a risk-off environment. Mr. Market would be risk-averse that day, so look here, on the charts, Euro/Yen, which is a good pair for risk-on or risk-off sentiment. And if you had approached on 23rd of May, if you had approached that day, thinking, “Oh, I would really like to buy Euro/Yen”, and it was a risk-off sentiment, you would have been wasting your money.

So, once you’ve established the sentiment, you can then look to take advantage of it. Because perhaps the day sentiment is against the main fundamental driver for a currency pair. In this case, the sentiment may offer you a chance to join the main fundamental direction, with a better price. The take away a piece of advice is this: Sentiment is simply the mood of the market and I need to know the mood of the market every time I’m trading so that I don’t misjudge it. Trade safely, trade wisely, and trade knowing the mood of Mr. Market for every single session.