Commander in Pips: Sentimental analysis is a bit more delicate substance than Technical and Fundamental analysis. Although technical analysis tells us that “price includes all available information” and that price is all trader’s need to make a deal decision – things are not so simple. We will not debate now on does price really reflect all available information or not – let’s assume that it does, but this point doesn’t mean that all traders open positions in the same direction. Of cause every trader sees the direction of the market, but almost everyone has its own explanation why does market move particularly this way.
But take a look at this moment from different side – maybe the market moves in this particular way (up or down), because it just mirrors what all traders think about it. Each trader opens positions according to his or her own thoughts and opinions about the market, and, it fact, all these positions create that substance that we call market sentiment.
Also I have to point out that sentiment analysis is closely linked with fundamental analysis, because it’s very often that sentiment forms under some fundamental factors affect.
Pipruit: Hm, it sounds like talks from another world. What is the practical application of this stuff?
Commander in Pips: Well, it’s very simple. For example, you are extremely bullish on some currency, say, EUR, but the market has a bearish sentiment – then the market will go down, and you can do nothing here. It’s a pity, but it’s true.
And there is a simple conclusion to us – you can’t for any reason ignore the market sentiment and have to take it into account and include it somehow in your trading strategy. If you will not do that – it will cost you money.
Later we will discuss how to analyze market sentiment so you can use it in your own favor.