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Sunday, July 21, 2024

What is market sentiment and how to perceive it

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The sentiment of a market refers to the general attitude towards it by investors at a particular time. It relates to the confidence traders have in the market and sets the tone of the prevailing overall feeling. As with many aspects in the investor and forex market, the sentiment can be influenced by a range of factors including global trends, political events and inflation and economies.

In basic terms, the market is considered to have a bullish sentiment when stocks rise for a continued period and a bearish sentiment when they sustain a consistent decline. Investors will ideally get a feel for the direction in which the market is heading and place trades relative to this. But, often, it’s not that easy to predict which way stocks will trend.

We’ll take a look at developing a market sentiment approach when it comes to trading and highlight the indicators that you should be aware of when investing.

How to develop market sentiment approach

Whilst relying solely on market sentiment on its own won’t help you place trades to exact timings, it can be a good indicator when used as part of an overall strategy.

Being aware of volumes and supply and demand can be a good indicator of where the market sentiment is likely to be headed. Declining volumes and high prices can signal a potential change in market sentiment, as can increasing volumes and low prices.

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The fear and greed index can provide a reliable approach to understanding emotions in market sentiment and is based on factors which influence the psychological aspects of investor decisions. These include market volatility, demand and currency price measurements over a certain time period. Fear results in investors pulling back or exiting trades, whilst greed sees the opposite effect, creating either a bullish or bearish market.

Indicators that you should watch out for

Broadly speaking, investors should be on the lookout for any changes or hint of change in the market sentiment. This can result from a variety of factors, and often occurs as a result of a combination of them. These can include:

  • News headlines and social media – Major global events such as conflicts, elections and economy shifts will impact market sentiment and such changes can happen quickly. This is especially true in the forex market as trends will follow a country’s economic outlook. Social media has been used by influential figures to show their attitude towards certain stocks, resulting in a large sentiment upturns or downturns.
  • Volatility index – this is often influenced by dominating global news events and can signal a fearful market. It’s measured by tracking the shift in price jumps of stocks to calculate expected volatility.
  • High or low stock price ratio – this compares how many stocks make their 52-day high and how many make their 52-day low, giving a calculation as to whether the market is headed in a bullish or bearish direction.
  • Investor behaviour – tracking trades placed by heavy investors can give an idea of whether the market sentiment is about to turn.

Whilst market sentiment alone is unlikely to be enough of a strategy, by reviewing the above factors regularly and combining with other trader analysis, you can increase your awareness and go some way to predicting market trends.

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