If you’ve been told Forex sentiment is important and that it’s important to pay attention to it. I’d like to give a second opinion on that note.
- Technical Analysis
- Fundamental Analysis
But out of the three above, tell me this — which one do you have an inch of control over?
The answer is Technical Analysis.
“But I don’t have any control over what my charts do”
Correct, but what you can do is create a chart-based system that is proven to work year after year, and let it run; do not deviate or let emotions get in the way either.
That’s far more control than blindly trying to predict where a bunch of retail traders are heading, or what a news report is going to say.
Most traders willfully participate in things they have no control over.
Ludicrous isn’t it?
So in that case, eliminate both fundamentals and sentiment completely.
Getting rid of sentiment is simple — just ignore it.
Still want to try?
So you still want to crack the Forex sentiment code?
Don’t spend too much time on this. It’s taking away from your overall system building, which is what’s important here. But if you can find a crack here, you may have succeeded where I haven’t yet managed too.
So let me set you up with a few resources here.
IG Client Sentiment
IG Client Sentiment Index is still pretty useful if you want to try and trade sentiment.
You can try and enter a trade when the two lines cross below, you can try and catch sentiment reversing at extremes, there are several ways to play it here. You can follow them on Twitter too right here, and catch periodic reports on the movement of the day.
Pre-warning- sometimes they show a 4-hour version of the indicator, and this is a way too zoomed-in version of what we want. Don’t get caught out.
This tool can be hard to access for non-members, but luckily, you can still follow them on Twitter here, and they do a great job posting daily snapshots of a lot of different pairs and indices.
You will see a few differences here and there with the way it reads compared to the IG Sentiment tool, but not hard to figure out and a lot more pairs are included with the SSI.
Avoid This Mistake
Let’s say the EUR/USD crowd is 70% long.
Which way are you going to go?
Remember, 70% of dumb money is currently going long.
The answer was C) “Do nothing”.
Why? Well, just a trick question, you should avoid chasing sentiment. The real reason is this. And let this be your one takeaway from the entire blog post…
It doesn’t matter where traders are. It matters where they’re going.
This is where all the “pros” go wrong. Firstly, they spend all this time on a tool we can barely use. Then, they’ll blindly say “It’s a contrarian indicator”, and if the masses are long, they will state that they have a “bearish outlook” on the pair; they will continue to say this as price just keeps going up and up and up. There aren’t any clear signs that you could use to enter or exit trades. But now you know better.
Furthermore…news outlets can give whatever reason they want as to why price does irrational things. More often than not, there isn’t really any correlation between price movement and the reasons they give.
So for now, just avoid sentiment chasing.
Work on your system. It’s tedious, I know, but you’re going to have it forever, might as well put the work in now. If you really want to incorporate the tools mentioned above, then by all means. (Just don’t get too attached to them)
But if any of you reading this find a way to use it successfully, please leave a comment under this post in the future! Best of luck, happy trading and as always…