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Understanding market sentiment

Understanding market sentiment

In this article, we will look at what market sentiment is, why it is important, types of market sentiment, and indicators measuring market sentiment.

Market Sentiment Explained

Market sentiment defines the general attitude of investors toward a particular financial market or instrument. Rising prices are representative of bullish market sentiment while falling prices indicate a bearish market sentiment.

Now since we got the basic concepts out of the way, it’s time to move to more in-depth details.

Why is market sentiment crucial for the world of trading?

The market sentiment does not always rely on fundamental analysis (economic or political news). Technical analysts do not neglect it, as it can influence technical indicators used for capitalizing on price movements. Additionally, market sentiment can be popular at times amongst investors who prefer trading in the opposite direction of the general market consensus.

When trading, keep in mind that emotion can be a significant market driver. A financial market reflects the mix of feelings of everyone involved. At the end of the line, it shows what the majority feels is going to happen.

There is no way you can dictate how the markets should behave, but what you could do is trade according to what is happening to them—using the market sentiment approach and deciding for yourself if you want to go with the flow or not. However, you can combine the market sentiment strategy with technical and fundamental techniques and potentially discover even more trading ideas and possibilities. The sky is the limit!

Because we mentioned some indicators used to measure the market sentiment, let us take a closer look at some of the most popular ones.

Popular indicators used for measuring market sentiment