By Adinah Brown
As a kid who grew up in the 90’s, I have to admit I love my trends, be they rollerblades, denim overalls and Discmans. Yet, when it comes to trading a trend isn’t worth jumping on board, just because of its popularity alone. With abundant data available each with their own analysis technologies, traders can review various indicators that they can analyze to inform the trading positions that they should take. While some still require intensive number crunching, others require a more qualitative analysis. Yet, whether you’re a technical or a fundamentalist trader, a tool that is popular amongst both sides of the trading camp is analyzing market sentiment, or market trends.
In the case of the market trend, it’s about getting in on the bend.
Although rhyming doesn’t necessarily make statements true, in this case it happens to be quite accurate. A trader’s success in using market trends is about buying just as the market is going to take a bullish climb and selling just as it takes bearish fall. These analysis tools are subject to a trader’s interpretation of the expected direction that the market will go. As you can see in the table below, the bars indicate the traders’ Buy/Sell tendency over a period of time effectively outlining for a trader the apparent trend of the markets expected direction.
There are a number of parameters taken into account when analyzing the movement of trends. The most fundamental is the buy and sell percentage that account for the moving distribution of positions for each instrument. Popularity is also important as it measures the percentage of positions opened on a specific instrument, out of the total positions opened in any given time. This figure is also indicative of the liquidity and the associated spreads, with high liquidity bringing down the cost of the spreads. Furthermore, the greater an instrument’s popularity, the more accurate are the buy and sell percentage figures as it’s a stronger reflection of more traders’ tendencies. Finally, the time frame over which the data is collected is also another important parameter.
Although the above information provides a clear indication of current market trends and which instruments are frequently traded, there is still more to this dynamic that’s needed to understand the full picture.
Sentiment Change Vs Current Trend
The time frame of a trend, may end up concealing new developments that have just started to take root. So while a trend is supposed to reflect the overall market tendency over a period of time, if there is a lag market sentiment will not be reflected as developments are occurring. For example, the bar line above for GBP/USD shows that 82.39% are buy positions, reflecting a very clear buy trend. However, a closer look into that development will show you that in the last half an hour the trend has actually declined and went down from 94.57% to 82.39%. This is then indicative of an entirely different story where traders are actually beginning to sell more, potentially to an extent that will reverse the swing of a trend in the direction of a sell.
Number of Positions Vs Amount Traded
It’s possible to argue that since the buy and sell percentage figures reflect a number of positions opened, they are not necessarily reflective of the overall amounts traded in each direction and can therefore be misinterpreted. For example over a time frame of one hour, 100 EUR/USD transactions are executed, 60 are a buy position with an average transaction amount of EUR10K and the other 40 sell positions have an average size of EUR 26k. Yet irrespective of the fact that more Euro was being sold against the USD, to a ratio of 1,170k: 550k, the sentiment indicator will still have a buy inclination of 60-40.
Perhaps contributing to the rapid popularity of Social Trading, is its ability to gage market sentiment. Social trading enables a trader to evaluate the movement of a select group of masters for whom they are able to choose specific characteristics, be it a specific market, a specific instrument, or amongst traders with a long and proven track record. Doing this, the trader might find that whilst the wider market sentiment is going in one direction, the trader’s niche subgroup may actually have a trading trend in the opposing direction, and it may be a direction that’s more accurate.
About the Author:
Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.