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.
High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.