How to Use Forex Market Sentiment Indicators

Sentiment indicators in the forex market indicate extremely volatile market conditions. Market reversal or continuation signals are sent through these indicators, based on which traders can place long or short orders. In our article, we will discuss the several forex market sentiment indicators available to trade with.

 

What are forex market sentiment indicators?

The forex market sentiment indicator can determine if the market is in a bullish trend or a bearish trend. It shows the percentage of how many traders have a similar view of the market during a specific period of time.

• When the currency pair prices continuously rise, and traders keep on placing long orders, the market sentiment is considered bullish.
• When the currency pair prices continuously fall, and traders keep on placing short orders, the market sentiment is considered bearish.

When a currency pair trades in a particular direction (up or down) for a long period of time, the market sentiment also suggests that the market can reverse at any time.

 

How do market sentiment indicators work?

The forex market traders' collective view influences the currency pair’s price movement. Hence, the forex market sentiment indicates the current market direction and predicts the future direction of the currency pair’s price. Since sentiment depends on how many traders have taken a long or short position in a particular currency pair, we can understand how market sentiment indicators work with an example. Assuming 100 traders are trading USD/EUR in the forex market. 65 of these traders are opening long positions, whereas 35 of them are opening short positions. Hence, 65% of the market sentiment is bullish, and 35% is bearish. Now, with continually increasing prices, 96 traders have become long traders, and only 4 traders remain as short traders. This would mean that there is a current bullish sentiment. However, since there are only 4 traders left who can drive up the prices, the market's sentiment will indicate a reversal. This will lead to sentiment trades entering short orders to avoid losses when prices decline. Hence, sentiment indicators do not provide traders with buy or sell signals but tell them if most traders in the market are going long or short, and help them place an order accordingly.

 

Top forex market sentiment indicators

 

1. Chicago Board Options Exchange Volatility Index (CBOE VIX)

The CBOE Volatility Index is a market index that represents the overall market’s volatility expectations in the next 30 days. When the market is too volatile, it indicates a bearish sentiment since there is high uncertainty. The CBOE VIX uses the SP500 as a representative of the whole market and defines the level of fear/stress in the market. It is one of the most powerful tools to interpret the market sentiments for currency pairs that are correlated with the SP500.

• When the CBOE VIX indicates a value above 30, it signals a high level of fear and uncertainty in the market, which leads to bearish sentiment in the correlated currencies.
• When the CBOE VIX indicates values below 30, it signals a low level of fear and uncertainty in the market, which leads to bullish sentiment in the correlated currencies.

 

2. New York Stock Exchange (NYSE) 200-day Moving Average

The NYSE 200-day moving average is a bullish market sentiment indicator. It shows traders the number of currency pairs that are trading above their usual long-term moving average. It helps in determining when the forex market sentiment has exceeded its limit and is likely to correct itself, leading to a bearish sentiment thereafter.

• If over 80% of the currency pairs in the market trade above their long-term moving average, it means that the market is overbought and will reverse into a bearish market sentiment.
• If less than 20% of the currency pairs in the market trade below their long-term moving average, it means that the market is underbought and will reverse into a bullish market sentiment.

Since it is a New York Stock Exchange indicator, it works best with the US dollar. However, this indicator can also ascertain market sentiments for other currencies that are strongly correlated with the US dollar.

 

3. High-low Index

The high-low index is an amalgamation of stocks reaching their 52-week high and 52-week low. It compares the high-price-touching stocks with the low-price-touching stocks to define the market sentiment and affects the currency pairs correlated with these stocks. For example, if a US stock touches the 52-week high mark, it will indicate a bullish market sentiment for the US dollar and vice versa. It helps in confirming the existing market trend.

• When the index indicates a value below 30, it indicates a bearish market sentiment since prices trade near their lows.
• When the index indicates a value above 70, it indicates a bullish market sentiment since prices trade near their highs.

 

4. NASDAQ Composite Index

The NASDAQ Composite Index reflects the overall market expectations with respect to price volatility in NASDAQ 100 stocks. Thereafter, it affects the currencies highly correlated with these stocks. The NASDAQ index is extremely relevant to currency pairs having strong economic relations with tech companies, like USD/JPY.

• When the NASDAQ Composite Index is trading towards its lower end, it indicates a bearish sentiment.
• When the NASDAQ Composite index is trading towards its upper end, it indicates a bullish sentiment.

 

Trade with the market sentiment indicators today

Identify the market sentiment with market sentiment indicators and place orders against tor in favour of the market. You can use a combination of sentiment indicators and technical indicators to confirm price continuations and reversals. Blueberry is a forex trading with tight spreads and quick withdrawals. Get started today to make the most of market sentiment indicators. Sign up for a live trading account or try a demo account.