Market sentiment refers to the approach of traders towards specific security or the financial market. In other terms, market sentiments are the feelings of investors concerning a particular asset over a given time. If the prices of underlying securities start rising, the market sentiment is known as bullish and vice versa. In this piece, we discuss trading strategies to exploit market sentiment.
A trading strategy comprises three main pillars including, technical analysis, fundamental analysis, and market sentiments. Unlike the stock market, it is more difficult to apply fundamental analysis in forex trading. Therefore, traders mostly rely upon technical analysis and market sentiments to trade currencies.
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Trading strategies to exploit market sentiment
Despite being aware of the market sentiment, it still sometimes becomes difficult to use the market sentiment for making rational trading decisions. Listed below are two trading strategies that you can use to exploit the market sentiment.
- Follow the market sentiment
- Trade against the market
Before we explain the trading strategies, we’d like to share a very important piece of advice with all traders that they should trade with a reliable broker because it is not possible to optimize profits with a dishonest or scam broker. After choosing the right broker, make sure that you stick to the given below strategies.
1. Follow the market sentiment
Considering the market sentiment, you can decide whether you wish to trade with the market flow or prefer going against it. In case you decide to stick with the opinion of the majority of traders, trading tools such as Fibonacci retracement can help you make profits from the price corrections.
2. Trade against the market
On the other hand, trading against the market involves identifying resistance and support levels to find reversal points. Traders often use market sentiments to estimate whether or not a breakeven may occur at a given spot. Not to mention, traders who can’t help themselves to follow emotions may consider sticking with the safe-haven assets. When the market is known to have high volatility and increased risk exposure, emotions can move in either direction over a short time. Therefore, people prefer holding their interest in assets such as gold. Undoubtedly, it can be a good move especially in the time when volatile tradable assets enter a bearish market. In such a scenario, traders may start anticipating a bullish market for safe-haven assets.
Types of Market Sentiments
There are two main types of market sentiments, including greed or fear. Traders are either afraid of losing their money or desperately want to make more money. Especially, when a market reaches peak points, it is more likely for traders to lose control of their emotions. One good example can be the surge in the prices of Bitcoin in 2017. People usually prefer holding long positions on hot assets whether it’s a major currency pair, a share of a company, or digital currency. However, it sometimes can be nothing but a diluted bubble that can burst anytime, making people incur severe losses.
Similarly, fear also prevails when the market drops to the lowest levels. Traders often go panic without realizing the real worth of the asset. A veteran trader may consider it to be the best time to open a long position. Well-versed traders know that the price of the underlying security will take a reversal leading them to generate potential profits. Not to mention, trading against the market flow always carries excessive risk.
How to identify greed or fear?
When a trend breaks a new resistance level without any fundamental backing – no major economic release, you can assume that the greed factor is in play. Similarly, if you notice a trend is breaking a support level without any solid reason – in the absence of adverse market news, you can call it the fear factor.
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Which of the trading strategy to exploit the market sentiment is the best?
Since people make and lose money in, either way, it is hard to tell the best trading strategy to exploit the market sentiment. It doesn’t matter whether you prefer staying with the market flow or going against it. You just need to work out a solid trading plan with appropriate risk management tools. Do not forget, trading market sentiment can be risky. It is better to focus on developing key trading skills rather than chasing off the market sentiment. Try to use a mix of technical and fundamental analysis to open or close trades. You can also consider trading less common pairs instead of the most renowned ones
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