What is a market sentiment indicator and how to use it?

Millions of traders trade on the international foreign exchange market, and each of them has their own logic and strategy. Due to the fact that it is impossible to analyze the behavior of each individual investor, a general indicator was developed that covers the analysis of the behavior of all participants in the Forex market. It is called  the market sentiment indicator  (MSI).

Market Sentiment Indicator: Basic Information

MSI is an effective indicator that is actively used by currency traders in the process of making important trading decisions. The market forex sentiment indicator allows you to determine the attitude of market participants towards a specific currency pair. Don’t forget that ordinary people trade Forex. Therefore, the human factor comes to the fore and those who take into account MSI readings significantly increase their chances of success.

But the significance of this indicator should not be overestimated. Experienced traders know that MSI must be used in conjunction with oscillators and trend indicators. Simultaneously using all these analytical tools will provide answers to the following questions:

• What position (buy or sell) do most traders take in relation to a specific currency?
• What is the current state of the international foreign exchange market?
• Is it worth opening a position on Forex or is it better to wait a little longer?
• What trends are observed in the market now, and what changes should we expect in the near future?

Market Sentiment Indicator: Features and Specifications

According to many experts, a trader who can correctly “read” the market sentiment indicator has a huge advantage over other market participants who ignore this indicator. It is a mistaken belief that prices change chaotically. The market is moved by traders, so the direction of the exchange rate directly depends on the attitude of the majority of investors towards a particular currency pair. It is not enough to rely only on the price chart when making important trading decisions; it is equally important to take into account such an aspect of Forex as the psychology of traders.

MSI is useful in that it is able to promptly warn investors about possible price fluctuations and other extreme conditions, in the event of which it is better not to open transactions. But it is important to understand that sentiment indicators do not give direct signals to sell or buy a specific currency pair. They only provide objective readings that can complement the results of fundamental and technical analysis.

Practical recommendations

If you decide to use the market sentiment indicator in the future, remember a few simple tips that will help improve its effectiveness:

• As practice shows, the most effective is to use a sentiment indicator in relation to such currency pairs as EUR/USD and GBP/USD
• You can make good money using MSI on time frames such as H1, H4 and D1. This is especially true for the EUR/USD currency pair
• The functionality of the MetaTrader 4 terminal allows you to select those currency pairs that can be traded using the sentiment indicator