If technical and fundamental analysis form the science behind forex trading, sentimental analysis is definitely the art. In being able to predict a currency value accurately, the price of a currency should reflect all available market information accurately.
In reality, markets will not reflect all the information at any time; simply because of the sheer size of the market. There are too many traders and their actions and each one of them will have their own set of convictions about the direction and value of price movements.
These beliefs and convictions translate to become the market sentiment. Like all other things markes sentiments are also driven by emotions of a network of traders (large and small). Hence you see large drops during the onset of economic distress as "fear" plays into price and sharp jumps when positive news is announced as "optimism" plays into price.
So how do you use market sentiment? In the simplest sense it is what the vast majority of the traders feel. It is tough to get your hands on this information as each trader is going to have their own opinion or even explanation of how and why the market does what it does. The market is in all actuality a network. It is complex and made up of a number of individuals who want to spam any and all news feeds out into the open for others to see.
If you think that dollar is going to rise in the end, but other people do not think so, you cannot actually do anything about it. At the end of the day it's a probability game. You want to trade on the same side as the majority of the traders to be on the winning side.
There are many factors that affect exchange rates of currencies. However some are more important in currency trading than others. These are; Interest and Inflation rates, Trade balance, Currency market speculation, Foreign investment and Central bank market intervention. Learn how to use these factors in your forex tra ...