Understand sentiment for FX success

5 June 2016, 09:36
Sherif Hasan
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After a few hectic weeks of financial news and events, Sheriff explains how he employs fundamental analysis on a daily basis to judge the currency markets and make trades.

Keeping track of the latest significant economic indicators and financial news has pretty much been my key to success when it comes to FX. In fact, I’d go as far as saying that monitoring the news on a daily basis always dictates how and when I trade the currency markets.

This is because I like to ‘tune’ into the market and gain a deep understanding of why it is moving in the way it is. This phenomenon is referred to as ‘sentiment’ – and it’s an absolutely vital skill for traders to refine and practice.

In short, sentiment is the explanation behind the current market patterns and trends. For example, the fundamentals could show reasons to buy the Japanese yen; but the market may be worried about an impending economic announcement or ill-judged quote from a government official, which then causes traders to lose confidence and sell the currency.

Despite not being problematic to long-term traders, these market shifts can seriously impact the profitability of short-term traders – if individuals are not paying attention to financial news and events.

Managing trades with fundamental analysis

Once I’ve placed a trade, I manage it by again employing the principles of fundamental analysis and sentiment. This is advantageous because it gives me ‘the big picture’. So if I read the market sentiment correctly, I have good reason to remain confident in my original trading position – even if the price moves against me – because I know the long-terms prospects are good. This only changes if there’s another significant shift in sentiment.

For example, if the bias is short, but a string of positive economic data is released during the trading session, there is a good chance that the sentiment can reverse and change the bias to long. With this in mind. it is very important for traders to constantly monitor the news feeds and remain abreast of what is moving the markets whilst trading.

Practice makes perfect

The key to successful trading is a consistent process of practice and evaluation. Plan your trades thoroughly, assess the outcomes and monitor how your management of the trade affected your profits.

It’s important to be open to development too. I am always learning and experiencing events that move the markets in a different way. With this in mind, it is absolutely vital for traders to accept that nobody knows all of the answers and that there is always more to learn.

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