Sentiment: The happy medium between fundamentals and technicals

[kris]

I notice that many traders are "black and white" on the issue of choosing technical analysis (price action) or fundamental analyis (macroeconomics) for their trading. Here's something to note: fundamentals may be govern price action over the very long term, but the fact that the FX market is so large and that there are so many different types of players that add to the complexity of the market (speculators, hedgers, central banks who each have a different motive) means that the market cannot possibly move with fundamentals in the shorter time frames.

So what does price move with? Sentiment. Sentiment is the reflection of how price moves according to fundamental stimuli. If price is reacting strongly negatively to sovereign debt issues (like the Euro is to the Greece story right now) then we can say that sentiment is strongly negative, even though fundamentally the US has debt problems as well and shouldn't be benefiting from Euro weakness.

On the other hand, sentiment can be negative if price is decreasing despite positive economic news coming out.

Do you use sentiment in your forex trading strategy?

[kris]

If there's enough interest, I can talk about different ways of measuring sentiment so that you can move with the driving force of the market. This can be things like using COT data, the volatility index, looking at news headlines, and more.

If you have a request for one of these or something related, please let me know and I'd be glad to elaborate on how to use it for profitable forex trading.

Kris Matthews

[Nirmala]

Hello Kris,

Thank you for your post, so which is better to trading? Fundamental or Technical analysis.


Regards,
Nirmala

[amna.joseph]

Well, there is no point of good or bad in technical and fundamental analysis. Actually this depends on the trading style you adopt. If you are looking for short term trades, then you can adopt technical analysis. Similarly, for long term trades, we can use fundamental analysis.

[Probafix]

Fundamental analysis is the study of economic force that effect world markets. Many trader believe that it is the best way to trade.