How to Trade Market Sentiment

The behavior of the masses works differently from the mechanism that determines individual actions. The discovery is quite old and well described in a book by a French anthropologist Gustave Le Bon in 1895 “The Crowd: A Study of the Popular Mind.” The author states some of the characteristics of the psychology of the crowds: “impulsiveness, irritability, incapacity to reason, the absence of judgment of the critical spirit, the exaggeration of sentiments, and others…”

Trying to take advantage form market sentiment is a common mistake by individual traders

Every trader knows the importance of emotions. You can see it in market volatility; you can see that some stock is overvalued in comparison to the company’s fundamentals, and others are undervalued.

Just like people on a rock concert, football game, or political demonstration transcend from individuals to a crowd, traders around the world create an entity that has its emotions and moods. The state of mind of the crowd of traders is called market sentiment.

The market sentiment is one of the three possible pillars for any trading strategy:

  1. Technical Analysis
  2. Fundamental Analysis / Trading the News
  3. Reading Market Sentiment

For Forex and especially cryptocurrency traders fundamental analysis is much more difficult to apply than on the stock market. That is why these markets traders focus on technical analysis.

Bulls, bears and “dumb money”

Understanding the sentiment will let you know whether the crowd is optimistic (bull market), cautious or pessimistic (bear market) about a currency, stock or crypto. Identifying the current trend can help you predict the future overall market sentiment and will open sentiment-based trading opportunities.

Market sentiment works for all kind of markets, but it is very difficult to read. There are big players, such as institutional banks that can play against the prevailing sentiment, and seek for so-called “dumb money.” Wait until the crowd gets all in on a particular position – be it long or short – and use the trading power to incite a reversal.

Follow or go against the market sentiment

There are two possible strategies for using the market sentiment. You can go with the current and try to join the crowd or trade against the sentiment. The first strategy would include tactics involving the Fibonacci retracement tool, that can help traders profit from local price corrections.

The second strategy is all about hunting for reversals identifying support and resistance levels and taking into consideration the overall market sentiment to decide whether a breakout may happen.

Safe-havens play an important role when the market sentiment goes to extremes, or there’s an overwhelming uncertainty. Assets like gold, USD, CHF or JPY are considered an excellent shelter in case of too much risk. When more volatile assets are entering a bear market, traders (including the most prominent players) tend to seek these safe-havens, which automatically creates a bull market on ultrasafe assets.

The two most dominant emotions

Fear and greed are the most dominant emotions among traders. They are either afraid of losing money, or they want to earn more. Greed is overwhelming at market peaks when the bubble is created.

A classic example of greed taking over in the peak of 2017 Bitcoin bubble

More and more people open the same long position on a hot asset be it a tech company, a currency of a fast-growing economy or a popular cryptocurrency. Just take a look at the most significant burst in crypto.

On the other hand, fear takes over when the market hits bottom. Traders are panicking underestimating the real value of an asset. A savvy investor can see an opportunity for opening a long position in these situations. However, trading against the trend always involves high risk.

How to identify fear or greed? When you see a trend accelerating breaking new resistance levels without any fundamental explanation – no critical information that would justify it – you may expect the greed is in action. The same mechanism works the other way around with fear. If during a downtrends support levels are broken without an apparent reason, the fear may have taken over.

How to spot “dumb money”

“Dumb money” is where traders are taking the most popular and the most obvious moves. Everyone takes the hottest position, more and more people join and put themselves in a very vulnerable position.

Let’s take a look at Forex, a market where individual traders compete with the largest banks to make successful trades. Forex is as susceptible to market sentiment. Both the biggest institutional traders and the smartest individual traders see where the “dumb money” goes. Then when there’s the right time, the most prominent players open an opposite position and take the profit.

You can find indicators that show the number of traders having a short or a long position on an instrument. It turns out that the market almost always suddenly goes the other way rapidly cleaning the trading accounts of those who “hang out with the popular kids,” that follows the crowd.

Hindsight bias

The market sentiment is very easy to read if you take a look back. Everything seems to be visible. Even if you are new to trading, you can easily spot greed taking over just when the bubble is about to burst. However, at the time of the bubble, hardly anyone notices it, even the wisest and most experienced traders.

It’s difficult to profit directly from fear or greed taking over. Even if you can read the past and present sentiment correctly, you need to know what the collective traders’ mood will be like tomorrow. Without any insider knowledge or ability to influence the prices with your trading volume it’s impossible to do it repetitively.

What is the best market sentiment strategy?

Keep away from it. If you don’t use the most popular technical analysis tools and don’t trade reversals, you can avoid the riskiest moves. If you don’t want to play the “dumb money” but avoid it, you can focus on developing an effective trading strategy. You don’t have to know where the “dumb money” will go. All you need to know is where the “dumb money” is usually and at present.

There’s no good way to chase sentiment. It doesn’t matter if you want to trade along with it or against it. Guessing the future sentiment is a risky move, that’s why avoiding market sentiment at all may prove to work best for you. Doing so you could develop a sustainable trading strategy with the right mixture of technical and fundamental analysis.

Don’t chase the sentiment. Invest not in the most popular assets, such as EURUSD, but the ones that are more off the radar. It’s best to find your own niche. Don’t be a herd trader. Choose one of the hundreds of instruments available at SimpleFX WebTrader, and use the best technical analysis UX and tools to learn how to trade effectively and don’t get disturbed.

Get Ready for SimpleFX Black Friday 50% Discount!

On Black Friday there are promotions everywhere. The retail stores aim at emptying their stock before the end of the year. That’s why they often open at dawn and offer radical deals on overstocked goods. Although most analysts argue the event has no predictable effect on the financial market’s long-term, that is it doesn’t make them perform better in Q4, Black Friday definitely has a short-term effect and may affect the volatility of some stock and instruments.

We want you to have one more reason to trade that day. On November 23 SimpleFX is cutting the spread on each transaction by half. It’s a total, unlimited 50% discount for every trade!

Here are the rules:

  • The discount will apply to transactions opened between 22:05 UTC on November 22 to 21:50 UTC on November 23, 2018.
  • SimpleFX will reduce the spread by 50% for all trades for every symbol: Cryptocurrencies, Forex, Indices, Commodities, Metals, and Equities.

Make sure you`re ready to take the opportunity. Add funds to your trading account before the Black Friday frenzy begins. Here’s how to do it.

Log into SimpleFX and choose a Live Account you plan to trade with.

Simple FX 1

For fiat money accounts – in EUR or USD – you can choose one of the leading e-money transfer services – Skrill or Neteller. The advantage is that they will both fund your account instantly and you will pay no fees. We set a minimum for these transfers at an equivalent for 20 USD. Once you choose the amount you’d like to send to your SimpleFX account via Skrill or Neteller, you will be redirected to their sites to complete the operation.

Simple FX 2

If you are trading with a cryptocurrency account – Bitcoin, Bitcoin Cash, Dash, Ethereum or Litecoin – you can make a deposit directly in this currency. There are neither fees or minimum deposits for this payment method. However, they take some time to fund. Usually several minutes, but sometimes up to 1 hour.

SimpleFX 3

Choose the transfer method and use the text or QR code key to connect with your crypto wallet.

SimpleFX 4

Add funds to any of your accounts and get ready for the Black Friday trading with 50% of the spreads. Choose any account and any instrument and enjoy!

Is it the beginning of the end?

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On Wednesday, U.S. equity markets suffered their worst selloff since last February. Volatility spiked 44%, trading at levels last seen in March. Treasury yields retreated slightly with 10-year bond yields sliding 10 basis points from a 7-year high. Growth stocks were hit hardest with a selloff in Tech companies dragging the Nasdaq Composite down 4.1%. The Dow Jones Industrial Average and S&P 500 were not far behind falling 3.15% and 3.29% respectively.

Has the Great Bull Market reached its end?

So many voices may begin suggesting that the longest bull market in history has come to an end. However, we experienced a worse selloff last February when the S&P 500 fell more than 10% in – “correction territory” during seven trading days. Back then the blame fell on strong economic data after wage growth grew 2.9%, suggesting that inflationary pressures were building, and the Fed would need to tighten monetary policy faster.

This time around it doesn’t seem a lot different. The only difference is that the reaction to higher interest rates was a little delayed.  Bond yields have spiked 40 basis points on the 10-year Treasuries since the beginning of September. This has called into question the valuation of many growth stocks, particularly Tech. It shouldn’t be very surprising to see this kind of reaction when the required return of equity, a key component in equity valuations, soars in a short time frame.

So far, we may describe the selloff as profit taking with many investors reconsidering their asset allocation weightings in their portfolios. Some investors will also be watching key technical levels, given that the S&P 500 is testing the 200 days moving average. This key support level has been tested three times in 2018 and managed to bounce again higher. However, a close below for two or three days may intensify the selloff for a couple of more days.

“The problem, in my opinion, is Treasury and the Fed. The Fed is going loco and there’s no reason for them to do it. I’m not happy about it,” said U.S. President Donald Trump

While I agree with President Trump that Wednesday’s selloff is the fault of the Fed, he should be reminded that the trade war he started with China and re-imposing sanctions on Iran is also to blame. His actions helped to build inflationary pressures and the Fed cannot stand still when it sees the economy overheating. A steeper selloff in equity markets will probably lead to a pause in hiking rates, but the Fed will be more concerned about the overall economic performance than just equity prices.

Now it’s up to the earnings season which kicks off on Friday to convince investors that earnings are still robust and the outlook is rosy. If corporate America paints a gloomy picture due to trade disputes, higher import prices, a stronger dollar, and other variables, this will confirm that stocks have topped out for 2018.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Risk assets under Pressure from higher Interest Rates

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Chinese equities took a big hit after traders returned from a week-long holiday. Efforts by the People’s Bank of China to free more than $100 billion in liquidity through cutting the reserve requirement ratio were not enough to offset the fear of slowing growth, the escalated trade dispute, and the rise in U.S. interest rates. The CSI 300 fell 3.6% late morning led by the technology sector as investors had the chance to respond to reports claiming that Chinese intelligence agents planted microchips to hack big tech firms and U.S. government agencies.

Risk assets may continue to be under pressure with future markets indicating a lower open to European stocks today. Increasing geopolitical risks, Brexit negotiations, the U.S.-China trade dispute, and U.S. mid-term elections are all sources of uncertainty. However, in my opinion, the biggest threat to the U.S. bull market remains the rise in U.S. interest rates. Last week’s selloff in Treasuries took the 10-year yields to 3.25%, a level was last seen in April 2011. The longer-term 30-year yields climbed to 3.42%, the highest since July 2014. The U.S. has $230 billion worth of debt auction this week, and if this caused a further rally in yields, investors might start considering pulling back from riskier assets as risk-free ones are beginning to look very attractive.

Friday’s non-farm payrolls report proved to be mixed, with job creation in September coming well below expectations at 134,000 vs the anticipated 185,000. However, the August figure was revised higher by 69,000, and the unemployment rate fell to a 50-year-low of 3.7%. The wage growth component of the report which has become a key indicator for inflation grew 0.3% in September and 2.8% Y-o-Y. Overall the report suggests that the labor market continues to tighten and the Fed needs to continue raising rates to manage the booming economy.

In currency markets, the Dollar was slightly higher against its peers. Euro and Sterling traders need to keep focusing on politics and interest rate differentials. Italy’s Deputy Prime Minister Luigi Di Maio intends to stick to plans to increase the budget deficit in 2019. If Rome and Brussels continue to clash over Italy’s budgetary plans, expect to see a renewed selloff in Italian assets and the Euro.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

USD/CNY: Trade War Turned into a Currency War and Escalates the Relationships Between the US and China

The news should excite currency traders who have sought to profit from increased volatility in the normally stable yuan this year. As a currency based on a fixed exchange rate controlled by the steady hand of the Chinese central bank, the Yuan has not heretofore received a lot of attention from traders. But traders should be aware that China has drawn a currency weapon to help prop up the Yuan.

The USD/CNY fell slightly to 6.8688 in early morning European trading but is still stable. The small bounce up seemed like a tepid response to evidence the US trade tactics are taking a toll on China’s manufacturing sector. But traders should take into account a heavier government price setting hand when estimating Yuan price moves.

In September, the South China Morning Post reported that the People’s Bank of China (PBOC) has reintroduced the ‘counter-cyclical factor mechanism’—described as a ‘black box’ used by market makers when setting the Yuan fixed exchange rate to protect against depreciation. Typically, the fixed rate is determined based on the previous day’s close and overnight changes in the basket of currencies the Yuan tracks. This rate is allowed to fluctuate up to 2 percent in the forex markets. Just before the trade war began in January, as the Yuan stabilized, China had withdrawn the mechanism but as the trade war puts downward pressure on the Yuan, the PBOC has decided to reinstate it.

For many market observers, such Chinese government interference to prop up its currency has turned the trade war into a currency war. For traders, trading on the news alone without taking the additional fixing mechanism into account could lead to overestimations of price movements in the Yuan.

Though when the US markets open, a more enthusiastic response to the decline in Chinese exports and manufacturing in the ongoing trade wars is expected. After 15 months of expansion and eight months after President Donald Trump started imposing tariffs on Chinese goods, China’s factory orders have slowed. The Purchasing Managers’ Index (PMI) for September declined to 50.8 from 51.3 in August. Officially, the 50-mark would indicate a contraction. Growth in new export orders, meanwhile, declined for the fourth consecutive month to 48.0 from 49.4 in August. Companies attribute the slowdown in exports to the US trade tariffs, according to the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), which reported a similar decline in September orders.

The currency war is now expected to escalate the trade war. President Trump has threatened China with more tariffs if it engaged in manipulation of the Yuan. In July and August, the USD was strengthening against the Yuan, which no doubt triggered China’s decision to reintroduce the counter-cyclical mechanism. Additionally, China is lowering taxes and fees to increase business competitiveness. The Services sector performed better, increasing from 54 to 54.9.

Manufacturing accounts for 30 percent and the services sector 54 percent of the Chinese economy.

Thusly, the trade war is expected to continue to escalate and create volatility in the USD/CNY pair. The Yuan has become more sensitive to the trade war than the USD; most recently, rallying on rumors of new trade talks on September 13th and falling three days later on Trump’s announcement of intentions to impose 10 percent tariffs on another $200 billion in goods by the end of September, and that tariff is set to rise to 25 percent by the end of the year. Furthermore, if China retaliated, which it did with tariffs in $60 billion on US goods, the US has threatened tariffs on an additional $287 billion in Chinese goods.

 USD/CNY implied one-day volatility of 4.9527 is steadily declining to 4.5600 for two-month volatility, and then slowly but steadily rising over the next three years.[1] Could the year-end volatility rise coincide with President Trump’s next trade salvo? Other factors will make the Yuan a more interesting volatility play going forward. Notably, to further ease pressure on the Yuan from the trade wars, China is accelerating the opening up of its capital markets and efforts to allow full convertibility of the renminbi. The Yuan trades offshore as the Offshore Renminbi (CNH).

BTC/GBP: Two Major Players in the Financial Arena. Here’s How to Trade Them

The BTC GBP trade pair matches Bitcoin with the UK currency GBP. Bitcoin is still the leading cryptocurrency with almost 50% of market share despite the emergence of many more contenders in the years since its launch. However, 9 years on from its launch, Bitcoin is still hugely volatile. This means that trading of this pair is very much focused on the price movement of the base cryptocurrency which, on an average day, dwarfs that of the fiat GBP side of the trade. For traders interested in trading the BTCGBP chart, it is important to understand the fundamentals of Bitcoin, how those of the GBP compare and the resulting dynamic between the two.

What is Bitcoin?

Bitcoin (BTC) is a decentralized cryptocurrency that runs on blockchain technology and aims to address perceived flaws in the traditional fiat currency system. Unlike fiat currencies, the total volume of Bitcoin that can ever be in circulation was capped at its launch – 21 million units. These are gradually released into circulation at a controlled rate based on predefined criteria until the final total has been exhausted. This means that the purchasing power erosion that fiat currencies suffer from when central banks increase their supply through money printing, which leads to inflation, should, in theory, never affect Bitcoin. The intention is that this makes Bitcoin an effective store of wealth as well as a medium of exchange.

The blockchain technology that Bitcoin runs on is an innovative mechanism to decentralize the system and means the rules-based system runs itself without the need for third-party management or a central authority. The blockchain is a peer-to-peer digital ledger system whose record is held on and updated by a huge network of computers, or ‘nodes’. When a Bitcoin transaction is made, a cryptographic process is completed by ‘miners’, whose job is to verify the transaction’s validity (ie. the entity making a transfer of Bitcoin is the owner of the currency being transferred). These miners, computers that form part of the p2p network, are incentivized by small Bitcoin payments. Because a majority of nodes need to agree on a transaction’s validity, and then all hold copies of the updated ledger, it is impossible to falsify transactions. This means that banks or other financial services companies, which Bitcoin’s creator argued have too much economic power, as a result, are not required. It also means transfers should be cheaper and faster than those via traditional fiat systems.

What is GBP?

The GBP, or pound sterling is one of the world’s ‘major’ fiat currencies and the 4th most traded in the world after the USD (U.S. dollar), EUR (euro) and JPY (Japanese yen). The UK’s currency and issued by the Bank of England, the GBP has historically been both one of international trade’s strongest and most stable currencies. It owes its relative strength to the historically stable political climate of the UK and its economy, to which the financial services industry contributes significantly. The past couple of years has, however, seen increased GBP volatility as a result of the uncertainty that the Brexit process has created since a 2016 referendum voted in favor of the UK leaving the EU.

BTC and GBP – Main Differences

Bitcoin is a cryptocurrency and the GBP, the trading code for pound sterling, is, of course, a fiat currency. The GBP’s value ebbs and flows in relation to other fiat currencies based on macroeconomic factors such as the strength of the economy, interest rates and other central bank-dictated monetary policy tools and sentiment around future developments. For example, uncertainty around Brexit led to a significant drop in the value of the pound against major peers such as the dollar and euro and all things being equal an increase in interest rates would be expected to strengthen the GBP. Volatility, while varying, is relatively low and against other fiat currencies averages around 0.6% a day.

As a cryptocurrency not tied to any particular country or region, the economic and geopolitical factors that fiat currency price fluctuations are influenced by, have little to no bearing on Bitcoin. Price is still a product of demand, but that demand is influenced by other factors. Because Bitcoin and cryptocurrencies are still relatively new, niche and in the process of gaining the trust of the wider general public, demand revolves around the market sentiment and future adoption rates. For example, mainstream financial exchanges launching Bitcoin futures in late 2017 was one of the major drivers of the bull run/bubble that took Bitcoin’s price up to around $20,000 from $1000 earlier that year. Conversely, Bitcoin’s price tends to suffer when negative news around security, such as exchanges being hacked and cryptocurrencies stolen, or fears of a regulatory clampdown, dampen sentiment.

Bitcoin is volatile and averages daily movement of over 4%, though this has been much higher in the past and on any given day double-figure swings are far from uncommon.

How to Trade BTC/GBP

The pair will most appeal to traders with sterling denominated accounts, as on cryptocurrency exchanges the USD is the default fiat currency that exchange values are calculated against.

The fact that Bitcoin volatility is so much higher than that of the GBP, on a daily and longer-term basis, means that trading this pair successfully will necessitate a focus on Bitcoin’s price movement. There is little value in taking GBP volatility into account.

Staying up-to-date on the news around Bitcoin, such as potential hard forks, the attitude of mainstream finance to the cryptocurrency and regulation will be key when it comes to either intraday or longer-term trend trading of the Bitcoin GBP pair. If holding long-term, traders will have to train themselves to not react to short-term volatility. It is common for Bitcoin to drop or rise 10% or more over the course of a day, or much more over a week or two, only for losses to then reverse just as quickly.