Market mood sways decisions

  • By Noah Schumacher

  • August 8, 2018
  • 5:59 pm BST

Forex trading is not quite as simple as you might think, but if you understand the fundamentals, you will quickly pick up on trends and learn to read into situations. The market mood at any given time plays a very important role in the decision-making process. This is correctly referred to as sentiment. Sentiment is what creates an environment that is conducive to either buying or selling a particular currency. It becomes especially important for those who trade on a daily basis, where understanding the feel of the market on any given day is paramount.

The fact that sentiment is not infinite is also a vital factor. Unfortunately, it is never quite clear how long any particular mood will last, whether it’s a day, a month or even longer. However, you can be assured that it won’t remain the same. An understanding of the fundamentals as well as the sentiment of the market must be equally attended to. While the fundamentals will allow you to understand the long-term movement of the market, sentiment or mood will provide the same intuitive understanding in the short term.

The term sentiment can be further divided into categories: risk on, risk off and the sideways market. While a risk on situation is conducive to making trades and chasing larger profits without threat to your capital, risk off is on the other side of the scale. The sideways market is the period between the two that leaves investors floundering for direction.

Err on the side of caution

There are times during any trading period when the market becomes uncertain. It is during these unstable times that investors and companies need a safe haven to protect their money. Current events and political instability are reasons for concern and do affect the state of the market considerably. Safe haven flows do follow trends, with many currencies appreciating rather than depreciating during periods of uncertainty. Taking heed of forex trading tips and trends like these will be helpful in earning a profit when chaos reigns in the market.

The Japanese yen (JPY) is a currency that is highly traded and is born from a sound political situation. While Japan has struggled with its GDP-to-debt ratio over the decades, it is also a country that owns considerable foreign assets that are comparable to the amount of debt it has recorded.

Japan is one of the only countries where the majority of national debt is held by debtors within the country. It is unlikely that these companies will recall a debt that would cripple their own country in the long term by causing the economy of the country to collapse. It is this factor that harbors such a confident attitude toward the yen and encourages the currency as a refuge during times of uncertainty.

Feel your way, but weigh the options

Weighing up your options properly and taking into account the fundamentals of the entire picture as well as the sentiment in the market at any given time is the best practice when it comes to trading in forex. An ideal situation arises when the sentiment of the trading environment perfectly complements the direction of the economy according to the ever-present fundamentals. It is important to remember that market analysis is vital regardless of whether or not the sentiment and fundamentals are on a positive note. In-depth research and knowledge is still required to calculate buy points that will keep the positive flow.

If you find yourself in a situation where the fundamentals might reveal a positive scenario but the sentiment presents a negative one, you can still place your trades with caution. The trades carried out now will hold higher risks and are best kept to the short term. In scenarios where sentiment and fundamentals don’t mirror each other, skill and understanding are required for you to make any headway in the industry.