What does the market feel on a given day? Well, the market is not an actual being in and of itself, but it is made up of a collection of traders who are all working to try to figure out where prices are or should be going. Thus, their actions are what actually make up the market sentiment.
Bears and Bulls
The two terms that you will hear about market sentiment quite frequently are that there is a “bear market” or a “bull market”. By this point, you should know what all of this means. The good news is that you can learn it all when you take the time to learn about what people are talking about.
Bull markets are markets in which the sentiment is positive. In these markets, the asset that one is looking at are likely to increase in value.
Bear markets are markets in which the sentiment is negative. In these markets, the asset that one is looking at are likely to decrease in value.
Responding to the Market Sentiment
Taking a sentiment-based approach to trading is a great way to decide if you want to go with the flow or if you are ready to take a contrarian position compared to where everyone else is now. The most important thing to remember is that you need to make sure you are looking at how the market is reacting to the newest pieces of information that is flowing into the market at this time.
Volume is what people tend to look at when trading on sentiment in the stock and/or bond market. Unfortunately, that is not going to work for you when trading in the Forex markets. Volume reports like this don’t exist for the Forex markets.
Instead, you will need to look at something called the Commitment of Traders (COT) report. We will cover this report in more detail later. The bottom line is that you need to look to the tools that you do have available in order to make your decisions. In this case, the COT report is the way to go.