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Measuring Sentiment in Forex Trading

Sentiment or psychology is important factor in forex trading. To a large degree, price movement in the forex market is the result of mass psychology of forex traders. Measuring forex trader's sentiment is a helpful approach for assessing trend, support, resistance, overbought or oversold conditions, trend reversal, as well as important price levels of the forex market.

Here are some valuable tools for measuring sentiment in forex trading:

VIX – Indicator of Market Volatility

VIX refers to the Chicago Board Options Exchange (COBE) Volatility Index. It is calculated from a weighted blend of prices for a range of options on the S&P 500 index. Although it is originally a measure of the implied volatility of S&P 500 index options, it has been widely accepted by forex traders as a key indicator of investor sentiment and market volatility as well. A high reading of VIX means greater degree of trading volatility or risk over the next 30 day period, while a low value of VIX corresponds to greater market stability.

US Dollar Index (NYBOT) / (USDX)

It is a measure of the value of the U.S. dollar relative to a basket of foreign currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The index is a weighted geometric mean of the US dollar's value compared to the currencies in the basket using March 1973 as the base period (100). In forex trading, US Dollar Index is often use by traders to assess the strength of US dollar.

Fed Implied Volatility Rates

Fed Implied Volatility Rates refers to the implied volatility rates for foreign exchange options provided by the Foreign Exchange Committee and sponsored by the Federal Reserve Bank of New York. These implied volatility rates averages of mid-level rates on bid and ask “at-money quotations” on selected currencies including the euro, the Japanese yen, the Swiss franc, the British pound, the Canadian dollar, the Australian dollar, the EUR/GBP and the EUR/JPY cross rates.

Implied volatility of an option, as the volatility implied by the market price, is a forward-looking measure of the option's relative value. A higher value for volatility means a higher theoretical value of the option. As a very important tool for professional traders, implied volatility is often used for option quotes instead of price. Therefore, Fed Implied Volatility Rates is a very useful tool for measuring the values of most traded currencies.

Real-time Forex Sentiment Indicator

These real-time forex sentiment indicators are based on data of real forex trading positions. They presents the ratio of open long trades to open short trades, and thus indicate forex traders' reflection of the market direction. They can be used for assessing trend, overbought or oversold conditions, trend reversal, as well as other important price levels of the forex market.

Commitments of Traders Report (COT)

Commitments of Traders Report (COT) is a weekly report published by the Commodity futures Trading Commission (CFTC) of USA. It lists current contract commitments by 3 groups of futures market participants: Commercial, Non-commercial, and Non-reportable. Issued on Friday, the COT report provides a “breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC” (CFTC).

COT can be used as a efficient tool for measuring market sentiment as well as for fundamental analysis. Professional forex traders have used Commitments of Traders Report (COT) as a substitue of volume data for estimating forex trade positioning and forecasting price trends. Read How to Use Commitments of Traders Report (COT) in Forex Trading for more information.


Related topics:

How to Use Commitments of Traders Report (COT) in Forex Trading

How to Choose a Best Forex Broker

How to Perform Fundamental Asnalysis in Forex Trading

How to Perform Technical Analysis in Forex Trading

Use Parabolic SAR in Forex Trading

Approaches of Risk Management in Forex Trading



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