I know that most of us focus on technical and fundamental analysis, but there’s another angle to explore—one that can give us an edge by simply tuning into the market’s "mood." Yep, I’m talking about sentiment analysis. While i cant really say I “use” this too much or at all, it’s all about getting a feel for how traders are collectively feeling—whether the mood is optimistic or cautious—and letting that guide us a little. The more you trade and longer you send on the charts with the pair you trade with you can eventually feel the mood.

At its heart, sentiment analysis is about tapping into the market’s vibe. Instead of pouring over charts or the latest economic data, this is about reading the room. How are traders positioned? How are they feeling about, say, a currency pair? In the Forex world, sentiment often hints at where prices are headed next because it’s driven by the expectations and reactions of traders.

If most traders are bullish, chances are they’re expecting prices to rise. If they’re bearish, they’re likely preparing for a drop. Knowing this can help us stay ahead—especially when the markets get volatile.

Now, how do we measure this? Here are a few key tools I keep an eye on:

- COT Report: Every week, the CFTC (The Commodity Futures Trading Commission) publishes the Commitment of Traders report, which shows how big players (like hedge funds) are positioned. When you see large traders are mostly long on a currency pair, it’s a strong hint that sentiment is bullish and vice versa.

- Retail Sentiment Indicators: Some brokers provide data on how retail traders are positioned. If most are going long, it might actually signal overly optimistic sentiment—a cue to consider going short as a contrarian play.

- News Sentiment: This one’s about reading the headlines and market commentary. When the media leans too heavily in one direction, it’s often a sign that the market’s about to correct itself, giving savvy traders opportunities.

Here’s where it gets interesting. Sentiment analysis is especially useful for spotting potential reversals. When sentiment swings to an extreme—either too bullish or too bearish—it often signals that a change could be on the horizon.

Some ways to use this to your advantage:

- Contrarian Trading: If most traders are positioned one way, it can sometimes pay to go the other. For instance, if 80% of retail traders are long on EUR/USD, there’s a good chance the pair is overbought and ripe for a reversal.

- Confirming Your Setup: You can use sentiment alongside your technical and fundamental analysis. If your technicals show a buying opportunity and sentiment is bullish, it adds that extra confirmation.

- Fine-Tuning Entries and Exits: Sentiment extremes can help with timing. If it’s showing signs of reversing, it’s often a good time to take profit or enter a new position. Which took me a while to realize!

- USD Sentiment: Let’s say the headlines are hyped up on strong USD data, and traders are piling into long USD positions. But when things get too one-sided, savvy traders start watching for signs that the uptrend is cooling off—and might even prepare for a sell-off to catch the market by surprise.

- Brexit and the GBP: Remember the volatility around Brexit? Sentiment on the British Pound was wild, flipping from extreme pessimism to sharp reversals when traders realized the market had overreacted. Those tracking sentiment were able to capitalize on these swings.

One last thing—while sentiment is powerful, it can shift fast, especially during major news events. So, it’s best to use sentiment as part of a bigger picture with other forms of analysis.

To be honest, I do not “use” this often. Sentimental analysis comes with time spent on the charts and it eventually comes as second nature as a quick glance. As a purely Technical trader, I will keep an eye out for Red Folder News and that’s about it. BUT! Learning sentiment analysis has taken my trading to another level of comprehension when marking up my charts. By recognizing when the herd is too bullish or bearish, I have been able to position myself to take advantage of sharp market moves.

Trade smart, trade well.