Sentimental analysis is what it sounds like – gauging the market sentiment. What does that mean? Well, as traders, a part of our job is to determine if a market is bullish, bearish, overbought, oversold, and to plan a trade for those market conditions – basically putting all of the things we’ve learned up until this point all together.
So how do we do that? What tools can we use? And how do we react to certain conditions? Well, that’s what we’re going to find out today – we’re going to take a look into sentiment analysis in forex trading.
Now there are a couple of ways to gauge different market conditions. Does anyone know what those two things are? You guessed it: technical and fundamental analysis. Now, in the School of Pipsology, we’ve covered most of the commonly used technical indicators out there for forex trading, so you should be an expert at that already right?
But how about the fundamental tools? What fundamental tools are available to gauge sentiment?
Well, in stocks and options, sentiment is measured using volume data. For instance, if a declining stock suddenly reversed on high volume that means the market sentiment may have changed from bearish to bullish. Or if a stock price was rising on gradually declining volume, then that may be a sign of an overbought market.
But have you ever seen volume data on any forex charts?
Being that the foreign exchange does not have a centralized market, volume data cannot be accurately calculated. So, where’s a trader to go to get such valuable data? That’s where the COT report comes in.