Some new traders, trying to trade market sentiment, end up trying to chase sentiment for too long. So, this article will help you understand what sentiment is and how long it typically lasts.
Sentiment is like a mood
Think of yourself on an average day. You tend to have days when you feel happier or sadder than others. Even within those days you have moments where you laugh, smile, or cry. In fact sometimes as people we laugh, smile, and cry in the same day! Our moods are variable and changeable. In general we may have ‘good’ days ‘ok’ days and ‘bad’ days, However, the next day our mood can often ‘re-set’. We might think yesterday was a really bad day, but today is a new day.
The market has a mood
Market sentiment is the current ‘mood’ of the market. So, on Tuesday this week the RBA shifted to a meeting by meeting basis which was negative for the AUD. In this instance we knew the market mood for that day was to sell the AUD. Similarly on Wednesday US ISM printed well above market consensus and, as the market was is so tuned into growth data, we could expect some USDJPY upside. Here was a link to the tweet sent just before the print explaining what to look for.
The market mood is short term
So, think of sentiment as a general rule lasting one day. This could be 2 market sessions. Then the sentiment ‘re-sets’. Now some events have more impact, but these are usually some major fundamental shift. So, if a central bank surprised markets with a big rate hike and said that more where to come, and the market was not expecting it, then that would be a fundamental shift. However, don’t get that confused with ‘sentiment’, which is short term.
Every day I run through the daily sentiment and choose a currency pair to look at.