Sentiment analysis is a type of forex analysis that focuses on identifying and measuring the overall psychological state of all participants in the market. Sentiment analysis attempts to quantify what percentage of market participants are bullish or bearish. Once the majority sentiment is identified, a sentiment analyst will often take up a position on the opposite side on the assumption that the crowd is wrong.
Trading solely on sentiment is a contrarian technique depending heavily on bull/bear ratios and other sentiment indicators. Instead, sentiment analysis is usually used in conjunction with technical or fundamental analysis to add more depth to a trader’s understanding of the market. However, using multiple types of analysis may overwhelm a trader as he or she must decide how much importance to give to the different signals.
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