Retail traders beware: Sentiment fades quickly in markets

Some new traders, trying to trade market sentiment, end up trying to chase sentiment for too long. So, this article will help you understand what sentiment is and how long it typically lasts.

Sentiment is like a mood

Think of yourself on an average day. You tend to have days when you feel happier or sadder than others. Even within those days you have moments where you laugh, smile, or cry. In fact sometimes as people, we laugh, smile, and cry on the same day! Our moods are variable and changeable. In general, we may have ‘good’ days, ‘ok’ days, and ‘bad’ days. However, the next day our mood can often ‘re-set’. We might think yesterday was a really bad day, but today is a new day.

Market sentiment is similar

Market sentiment is the current ‘mood’ of the market. So, on Tuesday this week, the RBA shifted to a meeting-by-meeting basis which was negative for the AUD. In this instance, we knew the market mood for that day was to sell the AUD. Similarly, on Wednesday US ISM printed well above market consensus, and, as the market was so tuned into growth data, we could expect some USDJPY upside. Here is a link to the tweet sent just before the print explaining what to look for.

Market sentiment is short term

So, think of sentiment as a general rule lasting one day. This could be 2 market sessions. Then the sentiment ‘re-sets’. Now some events have more impact, but these are usually some major fundamental shifts. So, if a central bank surprised markets with a big rate hike and said that more was to come, and the market was not expecting it, then that would be a fundamental shift. However, don’t get that confused with ‘sentiment’. The sentiment is short-term.

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