The sentiment is simply the current mood of the market. The market, like a person, is subject to different moods. Correctly reading the market’s mood is crucial in making a profit. Now, if you misread a person’s mood you may end up accidentally feeling the effect of a person’s bad mood. In a similar way, if you are unaware of the market’s mood or sentiment, then you may end up with a losing trade. The market is an emotional melting pot, prone to wild mood swings which can be overly optimistic or very pessimistic. So how do you correctly read sentiment and keep in step with the market’s present mood?
Sentiment is a short term
One of the key aspects to realise concerning sentiment is its difference from fundamental analysis. The fundamental analysis revolves around central bank monetary policy which produces long shifts and price movements influencing the market for days, weeks, and even months. In contrast, sentiment can be affected by a range of different triggers, not just monetary policy, and tends to be only short-term. As a general rule, most sentiment lasts only between 1 and 3 market sessions. The market craves and focuses on the freshest news. New information has the biggest effect on the market as it digests and prices in the new information.
Look at the previous two sessions for significant events
Thankfully, analysing sentiment is not a mysterious skill. At the start of every session, the latest sentiment will be obvious. If you read a previous session summary you will usually become aware of the most significant events that took place. So, if you are coming to your desk at the start of the US session read through the highlights for the previous two sessions. What significant events have just happened? What was a surprise for the markets? Maybe there was a political development that weighed on a particular currency. For example, perhaps a eurozone state was having an election and an anti-European party was just found out to be leading in the polls. This would have a negative sentiment on the EURO. Or was there a surprise data point from the UK which is positively influencing the GBP?
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