Sentiment is important.
After all, price action in the short to medium term is highly driven by it.
A market’s fundamental constituents are buyers and sellers. Both have an expectation of what the price should be.
If the situation is bullish, sellers expect more, and buyers will pay more. Should there be an event that triggers apprehension, buyers expect to pay less for taking on risk, and likewise sellers are happy to get rid of the asset even at a lower price.
This is the reason in our decade of forex analysis, sentiment has always been an important factor.
In our report, it is important to understand that this is the sentiment of retail traders. It differs from the sentiment of the investors or participants of the market.
Hence we employ a different kind of analysis on it.
In the top chart above, we use the data from our Premium Analysis service’s Retail Sentiment Analysis to plot a sentiment chart.
The number represents the percentage of retail traders who are long on the EUR/USD. Therefore, anything above 50 means that the overall sentiment towards the currency pair is bullish.
We placed the EUR/USD price chart below to highlight the correlation between sentiment and price.
As you can see clearly in the first two sections, as sentiment becomes less bullish, the EUR/USD price becomes more bullish.
Alas, this is a nod to the ” most retail traders lose money at forex,” statement.
Retail sentiment is climbing since 2021
Let us examine the last section.
We can see that the sentiment for the EUR/USD is rising since the start of 2021.
In the same timeframe, we observe that the value of the currency pair is facing bearish pressure. Notably, it has dipped below 1.2 recently.
While we cannot base our forex trade decisions on only one indicator, it is prudent to be mindful of the potential it is implying.
If the retail sentiment for the EUR/USD continues to climb, we may see increasing bearish pressure on the currency pair.
This fits into the current economic climate.
The European Central Bank appears to continue or possibly even expand its stimulus effort while there are talks about the US Federal Reserve tightening supply soon. This usually results in a euro bearish and US dollar bullish situation.
Sentiment analysis is crucial
We track sentiment for 6 currency pairs on a weekly basis, and this is reported as the Retail Sentiment Analysis for premium members.
The last update as of publication is 15 Mar 21. Members should log in immediately to view the full report. This helps to give a better understanding of the market conditions.
Forex trading success is never about trading only a chart. Secondary indicators such as economic climate and sentiment contribute to the overall assessment.