Market Sentiment

How's Mr. Market Feeling?

Every trader will always have an opinion about the market.

"It's a bear market, everything is going to hell!"

"Things are looking bright. I'm pretty bullish on the markets right now."



Each and every trader will have their own personal explanation as to why the market is moving a certain way.

When trading, traders express this view in whatever trade he takes. But sometimes, no matter how convinced a trader is that the markets will move in a particular direction, and no matter how pretty all the trend lines line up, the trader may still end up losing.

A trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market. That's right... EVERYONE.

This combined feeling that market participants have is what we call market sentiment.

It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market.

How to Develop a Sentiment-Based Approach

As a trader, it is your job to gauge what the market is feeling. Are the indicators pointing towards bullish conditions? Are traders bearish on the economy? We can't tell the market what we think it should do. But what we can do is react in response to what is happening in the markets.

Note that using the market sentiment approach doesn't give a precise entry and exit for each trade. But don't despair! Having a sentiment-based approach can help you decide whether you should go with the flow or not. Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas.

In stocks and options, traders can look at volume traded as an indicator of sentiment. If a stock price has been rising, but volume is declining, it may signal that the market is overbought. Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish.

Forex Pivot Points

Image via Wikipedia
Are you all excited? It's your last year in junior high before you head off to high school!

Professional traders and market makers use pivot points to identify potential support and resistance levels. Simply put, a pivot point and its support/resistance levels are areas at which the direction of price movement can possibly change.

The reason why pivot points are so enticing?

It's because they are OBJECTIVE.

Unlike some of the other indicators that we've taught you about already, there's no discretion involved.

In many ways, pivot points are very similar to Fibonacci levels. Because so many people are looking at those levels, they almost become self-fulfilling.

The major difference between the two is that with Fibonacci, there is still some subjectivity involved in picking Swing Highs and Swing Lows. With pivot points, traders typically use the same method for calculating them.

Many traders keep an eye on these levels and you should too.

Pivot points are especially useful to short-term traders who are looking to take advantage of small price movements. Just like normal support and resistance levels, traders can choose to trade the bounce or the break of these levels.

Range-bound traders use pivot points to identify reversal points. They see pivot points as areas where they can place their buy or sell orders.

Breakout traders use pivot points to recognize key levels that need to be broken for a move to be classified as a real deal breakout.

Here is an example of pivot points plotted on a 1-hour EUR/USD chart:



As you can see here, horizontal support and resistance levels are placed on your chart. And look - they're marked out nicely for you! How convenient is that?!