cTrader Market Sentiment thumbnail

Market sentiment refers to the overall state of mind of investors toward a specific instrument or financial market. It is the overall tone of a market or specific instrument revealed through the activity and price movement. In general terms, rising prices indicate bullish market sentiment, while falling prices indicate a bearish market sentiment.

NOTES ABOUT MARKET SENTIMENT
  • Market sentiment relates to the overall consensus about an instrument or the financial market as a whole.
  • With rising prices, market sentiment is considered bullish.
  • With falling prices, market sentiment is considered bearish.
  • Technical indicators such as [PoshTrader] Market Sentiment help investors to measure market sentiment.

Understanding Market Sentiment

Market sentiment, additionally described as “investor sentiment,” is not always based on fundamental information. Technical analysts and Day Traders rely on market sentiment. It affects the technical indicators they use to measure and profit from short-term price movements often caused by investor biases toward an instrument. Market sentiment is also important to investors who like to trade in the opposite direction of the consensus. For example, if everyone is buying, one would sell.

Investors define market sentiment as bullish or bearish. When bulls are in control, instrument prices are going up. When bears are in charge, instrument prices are going down. Emotion often drives the financial market, so the market sentiment is not always compatible with the fundamental conditions.

Indicators to measure Market Sentiment

Some investors profit by trading instruments that are overbought or oversold based on market sentiment. They use different technical indicators to measure market sentiment that helps determine the best instruments to trade on financial markets. Popular sentiment indicators include the Bullish Percent Index (BPI), High-Low Index, Moving Averages, and PoshTrader Market Sentiment Indicator.

Bullish Percent Index (BPI)

The BPI measures the number of instruments with bullish patterns based on point and figure charts. Neutral markets have a bullish percentage of around 50%. When the BPI provides a reading of 80% or higher, market sentiment is considered optimistic, with instruments likely overbought. Furthermore, when it measures 20% or below, market sentiment is negative and shows an oversold market.

High-Low Index

The high-low index examines the number of instruments making 52-week highs to the number of instruments making 52-week lows. When the index is below 30, prices are trading close to their lows, and investors have a bearish market sentiment. When the index is above 70, prices are trading near their highs, and investors have a bullish market sentiment. This method is a widely used trading underlying index, such as the S&P 500 and Nasdaq 100.

Moving Averages

Investors use the 50-day SMA (simple moving average) and 200-day SMA when determining market sentiment.

There are two basic scenarios:

  • The Golder Cross: the 50-day SMA crosses above the 200-day SMA, indicating that momentum has shifted to the upside, creating bullish sentiment.
  • The Death Cross: the 50-day SMA crosses below the 200-day SMA, indicating that momentum has moved to the downside, generating bearish sentiment.

To identify market sentiment using moving averages, NinjaTrader 8 users can utilize tools such are: [PoshTrader] Moving Average or [PoshTrader] Moving Average Crossover

[PoshTrader] Market Sentiment for cTrader

Percentage values showing the current difference between the number of traders, which have opened Long and Short positions on a specific instrument. At that, already closed trades don’t affect the indicator’s value.

This indicator shows the sentiment of individual traders for a specific currency pair. According to the fact that “the crowd is usually wrong,” we should open our trades opposite the crowd’s direction.

[PoshTrader] Market Sentiment indicator is a simple tool to practice the “Basic Ratio Strategy” on featured currency pairs.

Open a long position when more than 60% of traders are short, and open a short position when more than 60% of traders are long. When the ratio is close to the value of 50%, you should not trade.

[PoshTrader] Market Sentiment indicator helps you to analyze the ratio from different brokers to diversify risks. Look for the majority of brokers showing unidirectional signals.

cTrader Market Sentiment Described

Try it FREE for 7-Days: [PoshTrader] Market Sentiment

Conclusion

Market sentiment is a useful indicator to determine the level of bearishness or bullishness held by investors. Use market sentiment in two ways, as a contrarian and enter a market opposite to crowds, or use the market sentiment as a warning signal that a current or potential trade has too many investors rolling the same way.

Consider using market sentiment in combination with fundamentals and other technical analysis tools.

vwap

Today’s post is for a technical trader like you! Were going to introduce you to an indicator that takes into consideration price and volume, the Volume Weighted Average Price (VWAP) indicator!

What is the Volume Weighted Average Price?​

VWAP is an indicator of volume-weighted average price, which is a technical analysis tool that shows the ratio of an instrument’s price to its total trade volume. it provides traders and investors with a measure of the average price at which an instrument is traded over a given period of time.

VWAP is commonly used as a benchmark by investors who want to be more passive in the market – usually pension funds and mutual funds – and traders who want to be sure whether an instrument was bought or sold at a good price.

To calculate VWAP, you use the following equation:

VWAP = ∑ (amount of instrument bought x instrument price)/total instruments bought that day

The standard VWAP is calculated using all of the orders of a given trading day, but it can also be used to look at multiple time frames.

The VWAP ratio is then presented on a chart as a line. It has been likened to a moving average, in that when the price is above the VWAP line the market is seen as in an uptrend, and when the price is below the VWAP the market is in a downtrend.

Reading and Trading the VWAP Signals​

The signals from the VWAP could be confusing at some point. The reason for this is that the same signal from the indicator could be interpreted mainly in two different ways, Support, and Resistance with the VWAP or VWAP Breakout.

Support and Resistance​

The VWAP indicator can also help you to identify support and resistance levels. Since the indicator averages the total periods for the day, it has psychological meaning on the chart. If the price approaches the VWAP from below and starts hesitating in the area, then the VWAP may be considered resistance. If this happens in the opposite direction, then the indicator might be able to support the price, creating a bullish movement. Below you see an example of the VWAP as a support and resistance level:

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VWAP Breakout​

A breakout occurs when an instrument moves out of specific support or resistance level with a higher volume.
For the VWAP breakout, your strategy is to wait until the price goes above the VWAP indicator this means that the strength of the bullish move is strong. It is so strong that the price has managed to break its average value on the chart. Therefore, we get a long signal. The same is in force for a bearish breakout but in the opposite direction.

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Conclusion​

The VWAP indicator, just like the other technical indicators in a technical trader’s tool-set has no special powers. Unlike traditional moving averages which simply sum up the closing price of an instrument traded and divide it by a number of predetermined periods, the VWAP gives you the true average price of the instrument by additionally considering the transaction volume at a specific price. But if you use it the right way and under the right conditions, it can create many profitable trading signals.

The VWAP is a very good indicator, to be used by day traders, breakout traders, or momentum traders. Day traders find it especially helpful to know where the current market price stands in relation to the volume-weighted average price, in order not to buy instruments that diverge a lot from the VWAP. Breakout traders usually base their entry strategies on the VWAP breakout – a cross of the price below or above the VWAP which generates sell and buy signals, respectively. And momentum traders benefit from identifying early shifts in momentum if the price diverges is a large degree from the VWAP, accompanied by changes in underlying instruments fundamentals.

However, remember to apply money management rules when trading based on the VWAP indicator, and always look for additional confirmation signals from other technical indicators or candlestick patterns, chart patterns, or others. Just like with any trading tool, confirming the VWAP’s signals is a key measure to avoid false and lagging signals.