Understanding sentiment allows you to judge whether a market is feeling optimistic or pessimistic about the future of prices of a security, such as a stock or currency, for example. To their detriment, retail traders tend to focus more on catching reversals in strong trending markets than trading ranges. Therefore, when trading on sentiment, traders will find more reliable (contrarian) signals in strong trending markets. Before implementing a sentiment trading strategy, it’s essential to understand why client sentiment is regarded as a contrarian signal. For example, the EUR/USD chart below shows the projectible nature that can occur with IGCS.

  • However, these indicators should be used alongside other technical and fundamental analysis to provide added depth to research, rather than used as a single authority on the outlook for financial markets.
  • Final third-quarter gross domestic product data for France is also due, as are German unemployment figures for November.
  • The state of the property market is still a significant concern for investors, as housing transactions remain soft despite recent policy easing measures.
  • The dominant feeling in the market usually dictates the overall sentiment of a market.

Meanwhile, the Bank of Canada (BoC) should keep its overnight rate at 5%, leaving borrowing costs at a 22-year high. The BoC always said that it remains wary of inflationary risks and would not hesitate to move rates higher. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Regional investors ig market sentiment will be keeping a close eye on the release of preliminary euro zone inflation data for November on Thursday. Final third-quarter gross domestic product data for France is also due, as are German unemployment figures for November. European stocks rose as data signaling slowing inflation in Europe and the U.S. further fueled hopes that interest rates have peaked.


In the above diagram, price is in a strong uptrend and sentiment is showing over three times more short traders for every long trader, therefore, this can be regarded as a bullish signal. The top section of the diagram shows how price has evolved (green and red candles) and the blue/red sentiment line shows when traders are net long/net short. If there is a large distance between the sentiment line and price, this can be considered as a signal to trade in the direction of the trend.

“More good news on inflation has bolstered stock markets,” IG analyst Chris Beauchamp writes. Please ensure you fully understand the risks and take care to manage your exposure. While IG Client Sentiment is a useful tool, it doesn’t mean it’s perfectly predictive. Traders should still look to utilise strong risk management in their trades, even with the assistance of IG CS. The lower section of the diagram simply shows the actual number of short and long traders overtime. Since traders had become increasingly net-short, it’s no surprise to see the red line well above the blue line for long periods.

Production cuts are expected at the policy meeting, which is being attended by members of the Organization of Petroleum Exporting Countries and its allies, including Russia. U.S. stocks have also seen a turnaround in November, typically a strong month for equity markets, and are heading for their best month of the year. The news could tighten the market in 1Q “depending on adherence levels,” but market sentiment is jittery about demand prospects, says Ann-Louise Hittle, head of Macro Oils at Wood Mackenzie. To make the analysis easier, DailyFX provides a comprehensive report on major markets, showing IG sentiment overlaid on price.

This is already evident in recent strong operating momentum in the sector. The phenomenon, known as a “golden cross”, occurs when a stock’s 50-day moving average share price rises above the longer-term 200-day moving average. Wall Street regards the pattern as a bullish sign of a potential rally to come. Market sentiment has been boosted by expectations of interest rate cuts in major economies next year, as inflation continues to fall.

Conclusion: track market sentiment as part of your wider analysis

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This is particularly true for stocks and options as it can point toward rising or falling interest. If a company’s share price has continued to rise but volumes begin to drop-off, for example, then this could be indicative of weakening sentiment. Market sentiment represents the mood of financial markets and the general feeling among traders, whether they trade foreign exchange, the stock market or anything else.

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German retail sales rose by 1.1% in October from the previous month, the federal statistics office said Thursday. “Markets are now beginning to price for an April cut, and the price action for EURUSD in the coming weeks will be partially driven by the rate cut timing from the ECB vis-a-vis that of the Federal Reserve,” Tuckey said in emailed comments. However, he also said he thinks the Fed is “at, or near, the peak level” of where it needs to set the fed funds rate, the central bank’s benchmark for short-term lending.

Eurozone inflation eased more than expected to 2.4% in November, from 2.9% in October and versus expectations of 2.7%. WTI for January delivery settles down 2.4% at $75.96 a barrel after reaching $79.60 early in the day. February Brent falls 2.3% to $80.86, off its intraday high of $84.61. The Dow Jones Industrial Average led the way on Thursday as the big three indexes wrapped up a stellar November.

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How do you feel about financial markets – do you think they will rise or fall in the future? If you can answer that question, then you already understand what your personal sentiment is toward financial markets, whether you trade stocks, foreign exchange or another security. For example, the EUR/USD chart below shows the projectible nature that can occur with IGCS. The highlighted are on the chart exhibits an increase in net short positions from retail traders which coincided with a rise in price action (EUR appreciation) on the price chart itself. Simply put, retail traders contribute only a certain percentage of market input so naturally other factors will have influence on the respective market.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias. The pair had been trending lower in the early months of 2019, and client sentiment as seen below was a good predictor of possible turning points. Clients were significantly net long at the lows of the downtrend, for example at $1.13 and then $1.125, and then short positions increased at the lower highs at $1.15 and $1.14. This is presented in either a percentage form or a ratio form (dividing the larger percentage by the lower percentage). The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. This week, the Reserve Bank of Australia (RBA) is expected to keep its cash rate at 4.35%, after raising it by 25 basis points last month.