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What is The Difference between Forex Fundamentals and Sentiment?
Sentiment is basically the mood of the market, think of the market as a big group of people all trading against each other and if you put them all together you get one really complicated human being. When I talk about the market it’s almost as if I’m talking about a person and sentiment is the mood of that person.
When the market is in a bad mood it will tend to go risk off or try and look for safe-haven currencies because it’s fearful and scared of a potential crash. But when the market is happy, it’s greedy, it looks for higher yielding currencies to buy and doesn’t care about risk.
Fundamentals are what’s driving each currency at any given time in the long-term, and that is dictated by the central bank of each country and the interest rate expectations. So first of all we need to know what the central bank is doing and how that will impact interest rates in the near future. So if what the central bank are doing is expected to lead to interest rate hikes, the value of the currency will increase over the longer-term.
On a day to day basis currencies are volatile, the reason for that is because the market is constantly cycling between being driven by fundamentals and short-term sentiment.
For example- If the long-term fundamentals are up, the currency should be going up however it won’t go up every day because maybe one day, sentiment turns bearish and the market goes in a ‘bad mood’ for any number of reasons.
One of the main tools that I use is a premium news feed, which constantly keeps me up to date on what’s happening in the market in real time.
You should be looking for the reasons as to why the market is moving, so if GBP/USD has rallied 100 pips the first thing you need to do if figure out WHY it’s rallied, the reason as to why it’s rallied will give you a massive clue on whether or not it will continue or reverse. If the move up is in-line with the fundamentals you could look to get in and continue to ride it up however, if it’s against the fundamentals it might give you a good opportunity to get in the opposite way at a much better price.
Another more tricky way of doing it is by just trading the sentiment on a daily basis, if you know that traders are panicking and selling, you can just jump in and start selling using technical concepts you’re comfortable with that help you get into the market.
As long as you know the reasons for the individual move that’s happening that day AND you know what the fundamental outlook is in order to know which way the currency SHOULD be moving in the long-term. That information will give you confidence and tell you which way you should be trading those currencies on any given day.