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We do not include the universe of companies or financial offers that may be available to you. Editorial disclosure All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. With so many participants—most of whom are trading for speculative reasons—gaining an edge in the forex market is crucial. Fundamental analysis provides a broad view of a currency pair 's movements and technical analysis defines trends and helps to isolate turning points.
Sentiment indicators are another tool that can alert traders to extreme conditions and likely price reversals, and they can be used in conjunction with technical and fundamental analysis. Sentiment indicators come in different forms and from different sources. One is not necessarily better than another, and they can be used in conjunction with one another or specific strategies can be tailored to the information you find easiest to interpret.
Key Takeaways Sentiment is a measure of how traders and investors view the outlook for the market and larger economy. Forex traders can use technical sentiment indicators to help identify entry and exit points for currency pair trades. These include COT reports, open interest, and brokers' position summaries. How Sentiment Indicators Work Sentiment indicators show the percentage, or raw data, of how many trades or traders have taken a particular position in a currency pair.
When the percentage of trades or traders in one position reaches an extreme level, sentiment indicators become very useful. Assume our aforementioned currency pair continues to rise, and eventually, 90 of the traders are long 10 are short ; there are very few traders left to keep pushing the trend up. Sentiment indicates it is time to begin watching for a price reversal. When the price moves lower and shows a signal it has topped, the sentiment trader enters short, assuming that those who are long will need to sell in order to avoid further losses as the price falls.
Sentiment indicators are not exact buy or sell signals. Wait for the price to confirm the reversal before acting on sentiment signals. Currencies can stay at extreme levels for long periods of time, and a reversal may not materialize immediately. Commitment of Traders Reports A popular tool used by futures traders to get a sense of sentiment is also applicable to spot forex traders.
The data is based on positions held as of the preceding Tuesday, which means the data is not real-time, but it's still useful. Interpreting the actual publications released by the Commodity Futures Trading Commission can be confusing, and somewhat of an art. Therefore, charting the data and interpreting the levels shown is an easier way to gauge sentiment via the COT reports.
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