Focusing on market sentiment is a must for professionals, mainly because optimism and fear can drive valuations up or down. However, sentiment is hard to quantify, so traders must turn to several metrics, ones that can help them grasp what happens in the market.
Thankfully, brokerages offer access to reliable platforms and the option for an MT5 download, allowing their customers to benefit from several important trading tools. Some of them are useful in analyzing market sentiment, and that’s why every trader needs to be aware of them
1.Price action analysis
Naked charts can offer details into the market sentiment. When the price has a directional bias and pullbacks are almost nonexistent, that signals that there is a heavy imbalance in the order flow, with buyers overwhelming sellers. In this case, the sentiment is heavily bullish.
It is also possible to gain a more balanced order flow, when counter-trend moves can be noticed, even though there is a clear trend in play. With MetaTrader 5, traders can benefit from advanced
charting. The platform lets you customize charts (line, candlesticks, bars) and analyze assets on various timeframes.
In fact, there are no less than 21 different timeframes available, facilitating sentiment analysis both on short and long-term charts. Combining the bigger picture with small details – the kind that can be noticed on smaller timeframes – is one of the ways to navigate the markets more easily.
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Anyone can use moving averages, especially on timeframes like the daily one, to assess whether an asset has a bullish or bearish sentiment. The 200 SMA (simple moving average) has been considered a reliable dividing line between bullish and bearish territory for a long time.
To give you an actual example, the S&P 500 (one of the top indices in the world) has recently pierced above the daily 200 SMA, which is regarded as a bullish sign. When the price broke below the line back in February, the sentiment was bearish.
As a rule of thumb, moving averages can be a good reference point when used on higher time frames. In the short run, the price can swing below or above an MA, misleading traders throughout the day.
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One of the timeless mantras for trading is “the trend is your friend”. There are some complicated methods for determining when a market is trending, but the most basic one remains drawing lines connecting lows or highs.
By paying close attention to a trend line such as support/resistance, one can grasp whether the market is predicted to continue in the same direction. That’s an indication that the sentiment has not shifted. You can see now that stocks are resilient even in the face of major headwinds, mainly because on higher time frames prices do not break below the long-term trend lines.
Conversely, when a trend line is broken, that’s an indication of shifting market sentiment. The underlying order flow is starting to favor the other side, so traders need to adapt their exposure accordingly. All of the instruments above can be used with MT5, a platform that’s available with most trusted brokerages.