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Chris Cammack
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Author
Chris Cammack
Edited by
Chris Cammack
Partner Manager and Financial Writer

<p>Chris manages the relationships with our partners to provide our users with the best Forex trading experience possible. Chris has 15+ years of experience in research, editorial and design for political and financial publications. His background has given him a deep understanding of international financial markets and the geopolitics that affect them.</p>

Learn more about Chris Cammack
Author
Author
Alison Heyerdahl
Head of Content
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What is Sentiment Analysis?

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Sentiment analysis is key to understanding why price moves the way it does, as the market price is determined by how traders position themselves in the market.  This market sentiment explains the irrational behaviour of the market, and how investor's psychology impacts how currency exchange rates fluctuate.

What is Market Sentiment?

Whenever you open a trade, you are making a financial commitment.  And in doing so, you are expressing a view on what you feel the market will do. Overall market sentiment is derived from the combined perspective of all opinions, trades, and ideas of every market participant.  The combined market position is what we can define as market sentiment. Traders can tap into this comprehensive view of the market as a way of doing an analysis. There are technical indicators that offer retail traders a picture of all the orders and positions currently open with the broker.

Tools for Sentiment Analysis

There are technical tools that can help you gauge the market sentiment. The typical sentiment indicator will show the percentage of traders for long versus short. Below is a summary of all open positions by retail traders at Oanda.  It shows that 87% of the client orders on XAG/USD (Silver to United States Dollar) are long.  This means that 87% of the participants placing orders think that the price of Silver will rise against the Dollar. summary open positions Below is a summary of the sentiment of major currencies at eToro.  On the second row, it shows that 80% of the open orders on GBP/USD are selling because they believe the value of GBP will rise against the Dollar in the short term.

Contrarian Trading Using Sentiment Analysis

Sentiment analysis can help you spot contrarian trading opportunities. A contrarian trading strategy trades against the current market trend and centres around looking for points where a trend is likely to reverse. Contrarian trading is far from risk-free.  When you’re trading against a particularly strong trend, the market can sometimes continue to trade in the same direction longer than you can stay solvent. This is why it’s important only to trade those particular instances when you have excellent information to support your conclusion on future market movements. It’s recommended to only trade those instances when the market sentiment reaches extreme levels of more than 70%. In this case, you may consider fading the market or trading against the trend. euro dollar sentiment example

Example

From the first OANDA sentiment analysis chart above, the EUR/AUD satisfies this condition of almost 75% of retail traders being short on this market. The next step is to look for significant support and resistance levels to time the market. The sentiment analysis tool only gives you the state of the current market, which is why you need to use this sentiment analysis in combination with other supportive technical analysis tools. Successful contrarian traders try to minimise their losses and maximise their profits. Two key steps can help you achieve this:

  • First, use a protective stop loss to ensure any losses are well contained
  • Secondly, identify a strategy that allows your profits to run to benefit from the superior trading opportunities that the sentiment analysis method can provide you.

Incorporating sentiment analysis into your trading can add a competitive edge to your strategy.  It can help you quickly identify new trading opportunities that few others are aware of.

Conclusion

Smart traders wait for sentiment to reach extremes, and wait for significant and reliable data before engaging the market. Once all the trade setup conditions are made, be patient and wait for the market to confirm your analysis before entering. The main idea behind sentiment analysis is that you don't have to know the exact probability of a trade. All you need to know is if sentiment will be better or worse in the future, and base your trades on that assumption.

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Meet the Experts Behind Our Unbiased Reviews

Alison Heyerdahl

Head of Content

Alison Heyerdahl

Alison joined the team as a writer in 2021. She is the Head of Content for FxScouts. She has a medical degree with a focus on physiotherapy and a bachelor's in psychology. However, her interest in Forex trading and her love for writing led her to switch careers. She has a passion for Forex trading and over a decade of editorial experience researching Forex and the financial services industry, producing high-quality content. She hosts a weekly podcast, "Let's Talk Forex", alongside Chris and has produced over 100 Forex educational videos for the FxScouts YouTube channel. She also writes weekly technical analyses and has tested and reviewed over 120 Forex brokers.

Chris Cammack

Partner Manager and Financial Writer

Chris Cammack

Chris Cammack is partner manager and senior financial writer at FxScouts, specialising in broker relations and forex market analysis. As the former Head of Content (2019–2024), he set editorial standards for all content published at FxScouts, including broker reviews, broker comparison pages and education.


With over a decade of experience in editorial management and partner relations, Chris builds and maintains our relationships with our partners to provide the best Forex trading experience for our users.


He also co-hosts the “Let’s Talk Forex” podcast with Alison Heyerdahl, where he explores trading strategies, industry news, and macroeconomic trends to help traders navigate the markets with confidence.

Ida Hermansen

Financial Writer

Ida Hermansen

Ida is a financial writer with a degree in Digital Marketing and a strong background in content writing and SEO. Her expertise extends beyond marketing and writing, with a keen interest in cryptocurrencies and blockchain networks. Ida's passion for crypto trading sparked a deeper fascination with Forex technical analysis and price movement. She is continually expanding her knowledge in Forex trading, staying informed about the latest trends and identifying the best trading environments for new traders.

Stefan de Clerk

Financial Writer

Stefan de Clerk
The newest member of our team, Stefan has a degree in Marketing and more than a decade of experience writing quality content in both finance and tech. Stefan's deep fascination with how factors like geopolitical events, big data and market sentiment influence the financial markets drives his passion for Forex trading. He believes that if you want to feel the pulse of the world economy, trade Forex, and if you want to trade Forex, you need well-researched, unbiased and objective information.