Market sentiment is one of the first terms you’ll meet at the beginning of your trading career, and there’s a good reason for this — it’s damn important.
If you still have not heard about this, or have heard but do not quite understand what is being said, here is his definition:
Market sentiment, also known as investor sentiment, reflects the attitude of market participants to a particular asset or market. This can be thought of as the psychology of mass behavior, which shows whether the majority of investors put the rise or fall of a particular asset or market.
If prices for a particular asset are rising, this means that traders are opening or have already opened short positions on it, which can be perceived as a bear market sentiment. On the contrary, when prices fall, you can observe a bull market sentiment, showing that traders open long positions.
The most popular display of sentiment is in percent. 100% – the total amount of money, 65% – declining to the side of long positions, against the remaining 35%.
The benefits of market sentiment indicators become apparent when it reaches extreme levels, indicating that an asset or market is overbought or oversold and gives a correction signal.
If market sentiment shows that 90% of traders are bullish on EURUSD, it is unlikely that they will push the pair even higher.
This means that the pair will eventually decline and it may be worth making a profit and open short positions.
It should be noted that the indicators of sentiment do not give clear instructions for buying or selling. That is why traders need other ways to confirm that the correction will start soon or already in the process. Assets may have extreme sentiment values over a long period of time without obvious visible changes. In other words, beware.