Forex prices you want to know where there going so what's the most important variable. Supply and demand fundamentals – NO. A forex chart formation – NO The single most important variable is enclosed in this article.
It's the bullish or bearish sentiment of the participants.
I did a study of this 2 days ago on the dollar euro pair and since then the Euro declined by 400 pips and I said this in opposition to most of the market – does that make me smart or clever? Not at all, I just used some simple tools and stepped back to measure the psychology and you can use it to.
Let's take a look at this in more detail.
We all know the supply and demand fundamentals and the news will not help us make money as not only is it discounted in the price straightaway, but where prices go depends on how investors consider them.
Proof of this is that markets always collapse when their most bullish and rally when there is most bearish.T his is because humans dominated by greed and fear push prices to far either up or down and once prices have gone to far prices return to fair value. Of course away around this is to study forex charts and simply follow price action.
Forex charts are an excellent method of trading – but forex prices can give patterns that are false and it's a game of odds not certainties – so how about if we can add an extra filter in, to spot the reliable chart patterns and give more validity to them? Well you can and this will give you more confidence in executing your trading signals.
Your looking for formations where greed or fear have pushed prices to far from fair value. History show that short sharp price spikes are temporary and prices return to fair value.
You can see the spikes easily with technical analysis but how far will a spike go?
Let's check the sentiment.
The pioneer service was called% bullish and it simply polled market participants on their view fo either prices were bullish or bearish. When levels reached above 80%, it was considered to bullish and below 20% to bearish and a turn was probably.
You can do this yourself – in the euro I noticed in a Bloomberg poll 70% odd of people in the survey said interest rates in the US could fall by 75bps and 100% had deducted 50bps. Now 50% was discounted and probable and 5bps? The fed has never hinted at that so I looked for waning momentum in the euro and sold and got 400 pips. You can learn to do this yourself of course.
Get a Bigger Edge From The best Traders FREE!
There is another powerful tool and it's totally free, it's realized by the CFTC every two weeks and it's called net traders positions. In short it shows you how the open interest is broken down in the futures market (but it covers contracts) and has three groups: Commercials, large speculators and small speculators.
The commercials are the guys hedging no greed no fear they are just protecting what they have and they know fair value. Large and small speculators are governed by greed and fear and history shows they always oppose the commercials dramatically at important market turning points and who wins? You guessed it – the commercials.
The key with this report is to look for extremes and for commercial selling as speculators over buy. When they hold opposition extremes you know the commercials will normally come out on top.
Check the Sentiment Check the Charts For Entry
It's important to keep in mind that the above sentiment tools are not for market timing, or entering your trading signal – that comes from the reality of chart movement but they warn you of big breaks and reversals.
In recent articles I used this to hit two big trades short – two in the euro and one in the Canadian dollar, for nearly 2,000 pips profit and you can check them out.
Could you do this?
Of course you can – it just means looking at the sentiment and then hitting your trading signal when the forex price you are looking at sees weakening momentum on a forex chart.
Incorporate sentiment in your forex trading strategy and you can give your forex trading a new profitable currency, to anticipate forex price movement and enjoy long term currency trading success.