According to the data of the Bank for International Settlements, the forex markets trade on an average of $5.3 trillion per day. Just think how many participants you have to compete with per day, and that is why it is important to learn to analyze the fundamental, technical as well as sentimental indicators of the market. Think of these analyses as the three legs of a table; if one becomes weak, the table will not remain stable.
Sad to say, but the truth is that even the most experienced trader neglect the power of sentiment indicators. These are the indicators that show how many traders are taking a particular position in a particular currency pair. Suppose, you are checking a data of 100 traders, of which 80 have opened long position, and the remaining 20 have opened a short one which means 80% of the traders are going long in the currency pair.
It can show the reversal in the price and if the markets are going bullish or bearish. Let’s extend our previous example: Suppose the traders who have opened long position increases to 90%. It is not possible for the remaining 10% traders to keep pushing the trend up. So it is the time for the analysts to analyze that the trend further cannot go up and the price will take a ‘U’ turn.
It is important to remember; especially for the beginners that just the reversal of price is not an indicator of buy and sell. There are many other indicators that analysts check begore opening or closing a position. The prices may keep on going up and up and stop at a point for several days, but one should take some decision only when it starts reversing. So, it is always important to keep a check on the price movement.
The price and buying history also plays an important role. Suppose, in the history, for a currency pair; the price reversed after a holding of 70%. So, it is highly likely that even now the price may reverse before or at 70%.
Market sentiments give out the best prediction when coupled with the fundamental and technical analysis.