Sentiment analysis for Forex trading: how to apply its main indicators - TopForex.Trade

Sentiment analysis for Forex trading: how to apply its main indicators

Sentiment analysis in Forex trading: expert explanation of the analytical concepts, its application with Fundamental and Technical kinds of analyses, and essential indicators to employ for better trading decisions. Top Forex brokers with advanced trading platforms and built-in analytical tools, multiple assets available for trading, including their CFDs, Forex pairs, and Cryptocurrencies with free VPS services, Copy trading and Forex bonuses.

Forex Sentiment Analysis: another way to study the market

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Recent data from the Bank for International Settlements (BIS) states that daily Forex transactions amount to an average of over $6 trillion made by approximately 10 million traders around the world. Omitting long-term investors, most of the other market players are there for active trading and speculative purposes. If you wish to join ones, who do it with relative success (trading losses are inevitable even for professional traders), then studying Forex market patterns, concepts, and principles is a must. 

Technical analysis serves to define trends and turning points while Fundamental analysis gives a wide overview of a currency pair’s movements. Another tool that might warn traders about out-of-blue situations and potential price reversals is the use of Sentiment indicators, which can be combined with tools of both Technical and Fundamental analyses.

Multiple sources and formats are used for sentiment indicators – there is no right or wrong way to use them; they can be combined, or particular tactics can be made to fit the presentation of data that you find the simplest to understand.


The essence of Sentiment analysis for Forex trading

Essence of Forex Sentiment trading

Sentiment analysis is a type of FX analysis that focuses on identifying and, as a result, quantifying the general psychological and emotional condition of all market participants.

This type of Forex study is to quantify the proportion of FX market players who are bullish or bearish, or optimistic or pessimistic, respectively. An analyst will take a position opposing the notion that the crowd is erroneous once the majority of market emotion has been effectively detected.

A contrarian strategy that strongly relies on bear and bull ratios and other sentiment indicators involve trading solely on feelings. As we said before, in order to give a trader a deeper understanding of the Forex market, Sentiment analysis is typically combined with Fundamental or Technical. It’s important to be aware that using all three sorts of analysis at once can be challenging but is unquestionably worthwhile.

Another aspect of Sentiment analysis is the market’s frame of mind towards the risks. When feeling secure about pursuing larger profits, traders may typically target higher-yielding currencies and assets when they are in the mood for more risk. On the other hand, market players may prefer to put their funds in safe-haven assets like the US dollar or gold when they don’t feel adventurous.

Any financial asset’s price change makes reference to the sentiment of the market. The biggest and most important short-term component in all price swings may be the emotion of the Forex market in cases where there is little to no news regarding particular securities. Even when we see important news about it or a company published, the actual price changes are usually boosted or suppressed. It all depends on whether the foreign exchange market is bullish or bearish at the time.


Major Sentiment trading indicators

Major Sentiment trading indicators

What are the main Sentiment indicators? Putting it simply, it is a numerical or graphical indicator designed to demonstrate how certain market players feel about the economy, market, or business climate, as well as other related issues. Plenty of these indicators are open-sourced and available for everyone.

Three major groups of them include:

The Volatility Index of the FX market

The Volatility Index (VIX) is one of the most popular Sentiment indicators in the traders’ communities. As you probably know, volatility refers to the changes in which a price diverges from the mean price over a given period of time, and it is one of the most important parameters for active day traders. Additionally, rather than measuring the historical volatility of the options purchased and subsequently sold on the S&P 500 Index, the VIX measures the implied volatility rate.

If we think about options as a way to protect ourselves from a significant trend against a corrective price movement, then we surely grasp what follows: certain trend-following traders are more afraid that the Forex market is reaching an extreme as implied volatility increases.


Contrarian Sentiment indicators

According to the dictionary, a contrarian as a noun is “a person who opposes or rejects popular opinion, especially in stock exchange dealing.” Contrarian investing is based on crowd behavior:  sell when optimism is at its peak and buy when pessimism is at its highest and the market has bottomed out. This approach exists solely because prices are determined by market sentiment. Crowd behavior is a conglomeration of numerous biased thoughts and processes, making it nearly impossible to quantify.

There are some tools in the sentiment indicator category that we can use to define bullish or bearish sentiment. There are many of them, and there are an infinite number of ways to interpret them. Again, Sentiment indicators should be used in conjunction with other indicators and Fundamental analysis.


Report of traders’ commitment

The COT report (Commitment of Traders Report) can provide the latest information about market trends, as well as the strength of traders’ commitment to it, by detailing the actual positioning of speculative and commercial traders in a variety of markets. Keep in mind that Forex is an over-the-counter (OTC) market, so the future markets are used as a proxy for the actual spot market here.

Every Friday, the Commodity Futures Trading Commission (CFTC) publishes a new COT report, covering Forex market sentiment over a specific time period. The COT report does contain a lot of other useful information, but its main purpose is to provide data that shows the net long or short positions for every available future contracts, for both commercial and non-commercial traders.


Futures open interest as FX Sentiment indicator

Futures Open Interest

As you know, the Forex market operates “over-the-counter,” with independent brokers and traders from all over the world forming a decentralized marketplace. While some brokers publish volume generated by client orders, it pales in comparison to volume or open interest data available from a centralized exchange, such as a futures exchange.

Statistics for all futures contracts traded are available, and open interest can be used to define a sentiment. Simply put, open interest is the number of contracts that have not been settled and are still open positions.

If, say, the JPY/USD currency pair is currently trading higher than average, looking to open interest in Japanese Yen futures provides additional insight into the pair. Increasing open interest as the price moves up indicates the trend is likely to continue. Leveling off or declining open interest signals the uptrend could be nearing an end.

Below you can find how open interest is typically interpreted for a futures contract:

  • If both futures price and open interest are rising, then the current trend is strong or strengthening;
  • If futures price is rising, but open interest is falling, then the trend is weakening;
  • If futures price is falling, but open interest is rising, then the trend is weak or weakening;
  • If both futures price and open interest are falling, then the current trend is strengthening;

Strength in euro futures, for example, will almost certainly keep pushing the EUR/USD up. Or, Japanese yen futures weakness (US dollar strength) will likely push the USD/JPY higher.


Trading positions analysis as FX Sentimental indicator

Trading Position analysis

Many Forex brokers report the total proportion of traders or trades that are currently long or short in a specific currency pair in order to increase transparency in the Over-The-Counter Forex market.

Since clients’ data of only that broker were analyzed, it offers a microcosmic snapshot of market mood. A broker’s published sentiment reading may or may not match other brokers’ published data. While larger brokers with more clients make up a larger portion of the entire market and are therefore likely to give a better indication of overall sentiment, small brokers with few clients are less likely to accurately represent the sentiment of the entire market (composed of all brokers and traders).

On their websites, many brokers offer Sentiment analysis tools without additional charges, so you can verify different assessments across several brokers to check if they are consistent. For example, some broker signals may indicate that a reversal is very certainly imminent. Yet, this type of indication shouldn’t be used until the sentiment statistics are aligned across several sources.


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Forex brokers with the best trading platforms

Sentiment analysis can be a huge help when it comes to Forex trading and investing as the general mood in the foreign exchange market indicates market direction, following what traders think, whether they are bullish or bearish. It actually aids in determining all market participants’ psychological and emotional attitudes. Based on the current situation, you can use this analysis to forecast market movements. You should also consider using Sentiment indicators to improve the precision and utility of your analysis as they can give you insight into the underlying strength of market movements. You will understand market sentiment if you understand everything mentioned above.

Whatever market you choose to trade in, Technical, Fundamental, and Sentiment analyses are essential. Yet, if you are still looking for a suitable market, one popular choice is the Forex. When deciding which market to trade in, traders look for the best trading conditions and potential. Millions of traders around the world believe the Forex market meets these criteria for a variety of reasons, including convenient trading hours, high liquidity, the ability to trade using leverage, and the presence of some of the world’s most well-known and reputable brokers to manage the trade like the ones listed by experts below.

Exness Forex trading

Exness offers clients all over the world user-friendly Forex trading services. Many popular assets, such as currency pairs, stocks, indices, metals, energies, and popular Cryptocurrencies are on the company’s list of available instruments.

The company provides a number of terminals to choose from, including Meta Trader 1, Meta Trader 4, MetaTrader 5, and MetaTrader WebTerminal, so that any market participant can design the most efficient trading process possible. Exness has also created a mobile app for iOS and Android in order to avoid being tied to a computer.

Clients can find standard retail and professional trading accounts, as well as a demo account, to practice their skills before entering real trading.

Exness has established itself as a reliable brokerage provider in the Forex market over the years, as evidenced by licenses from regulatory bodies such as the FCA, CySEC, FSCA, FSC, FSA, and others.


OANDA Forex Trading

OANDA is a well-known broker for traders all over the world. Trading is available for over 100 financial products, including currency pairs, cryptocurrencies, indices, commodities, bonds, and metals. EUR, GBP, CHF, USD, CAD, AUD, JPY, HKD, and SGD are the broker’s nine basic currencies.

OANDA provides retail Sentiment data through its premium MT4 indicators, which live account traders can download and install on top of their MetaTrader 4 platform. It’s called OANDA Sentiment Trader and is an expert advisor rather than an indicator: it can be used to execute trades as well as monitor existing positions across currency pairs.

Furthermore, the broker provides three account types globally: demo, standard, and advanced trader, making it appropriate for both novice and experienced traders. Furthermore, OANDA encourages traders to put their skills to the test by using a demo account with an unlimited amount of virtual cash and an indefinite time limit.

OANDA is also widely regarded as one of the most reliable Forex brokers. It is authorized to conduct business in a number of countries and is a member of the following regulatory bodies: IIROC, FCA, and ASIC.

eToro Forex trading

eToro is one of the largest social trading platforms for online deals with stock, currencies, indices, and commodities. Traders can buy and sell a variety of financial instruments using eToro’s innovative and user-friendly “OpenBook” trading platform, as well as use eToro’s CopyTrading feature, which allows novice traders to copy the trades of more experienced peers. At the same time, the latter have the opportunity to supplement their income through their skills and abilities.

Traders can use their smartphones to trade alongside eToro’s web-based trading platform by downloading mobile apps.

Retail and Professional Client accounts are available, as well as a free demo account with a virtual balance of $100,000, which will be useful not only for novice traders but also for experienced market participants.

In all the years that the eToro broker has been on the market, it has managed to establish itself in the online trading community as one of the most respected brokers in the industry, being regulated by such reputable organizations as the FCA (UK), ASIC (Australia), and CySEC (Cyprus/Europe). The broker will also welcome you with special offers, the details of which you can find by clicking the button below.



XM Group Forex trading

XM Group offers a diverse range of financial instruments such as more than 55 currency pairs, their CFDs, stocks, gold, energy, commodities, and more.

The broker, like any other respectable company that provides access to the Forex market, has several types of accounts that differ in their conditions and are targeted at different client groups, including Micro, Standard, XM Ultra Low, and Shares. Beginners can begin with a demo account that replicates all of the functions of a real account in order to gain experience and begin trading live like a pro.

The platforms are represented by the well-known MT4 and MT5, which have also been optimized for mobile devices. Furthermore, traders can use the free VPS service to ensure continuous operation.

XM Group is a broker that adheres to the strictest regulatory requirements. Its operations are overseen by European (including British) and Australian authorities. XM Global, a brand owned and operated by XM Global Limited, is also part of the XM family. It is licensed and regulated by the International Financial Services Authority of Belize. Furthermore, it offers lightning-fast order fulfillment, support for over 30 languages, and regular customer and partner promotions.


NAGA Markets Forex trading

NAGA Markets is a regulated broker with years of market experience that offers commission-free trading in over 750 instruments such as currency pairs, Cryptocurrencies, Indices, Commodities, ETFs, and Futures, their CFDs as well as real stocks through a multi-currency account.

To enter the Forex market, traders can use the popular trading platform MetaTrader 4 and its newer version MetaTrader 5, as well as the NAGA web platform with mobile applications developed by the company. One of the main advantages of the NAGA offer is the possibility of Social trading, which is the automatic copying of professional trades.

Market participants can choose from unlimited demo accounts, real accounts, Professional accounts, and VIP accounts. You get a trader’s level, bonuses, and discounts based on the amount of money in your account.

NAGA clients can replenish their trading accounts through bank transfers, payment cards, electronic payment systems such as Giropay, Skrill, Neteller, PaysafeCard, and Klarna, as well as cryptocurrency (Bitcoin, Ethereum, Dash, Litecoin, Bitcoin Cash, and NAGA Coin). The FCA and CySEC are two well-known and trusted regulators that have granted the company licenses.


Sentiment Analysis for Forex trading - FAQ

As described in the article above, Sentiment analysis is used to study the crowd behavior of traders community: how they feel about the overall currency market or a specific currency pair; what is their attitude towards the risks, or how they expect some major economic or political event to influence the market. Since people’s expectations and perceptions are one of the main reasons for market price volatility, it’s crucial for traders to understand these patterns of community action to predict market moves.
Sentimental analysis is better used in combination with Forex Technical and Fundamental analyses. Using market sentiments you can better understand market mood; Technical analysis will help you to analyze price movements from a historical point of view using advanced trading tools and features; Fundamental analysis is all about forecasting how major economic, political, and social events will influence asset price levels. With all these data gathered, traders can be better prepared for market turns, adapting their trading strategies.
As we convey in the article above, Forex sentiments are the set of indicators that can help traders to understand and predict market dynamics: will it go bullish or bearish; is the current trend about to change or likely to continue? Combined with Fundamental and Technical analyses, it’s essential for building your trading strategy.
There are several sentiment analysis indicators that are especially popular among traders. On the top of the list is futures open interest. In the article above you can read about how to use it to predict market changes if you know the number of the still open and closed futures contracts by the end of the trading day.
The overall number of futures contracts owned by market participants at the end of the trading day is referred to as open interest. In our article, we talk about how to use it as a market sentiment indicator to determine the strength and direction of price trends.