According to a recent report by the Bank for International Settlements (BIS), there are, on average, almost $6 trillion of forex transactions on a daily basis.1 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.