About Us
Trading
Platform & Tools
Partner with us
Help
Create an account LOG IN

Loading...
No results

Getting Sentimental

post content image

We believe that wherever possible, we should remove emotions from our trading psychology and try to act logically and systematically when making trading decisions. That’s because there are facets of our emotional selves that are just no good when it comes to making money. Impulses that encourage us to snatch at profits, make rash trades and run losses can be detrimental to our wealth in the same way that running out into a stream of moving traffic could be very detrimental to our health. We could go so far as to say that there is no room for sentiment at all in trading, but if we said that we wouldn’t be entirely correct. Because while it’s true that we want to remove sentiment and emotion from our own trading, we should be quite happy to take advantage of other people’s sentiments.


Picking the right wave

Trading is effectively a three-way competition. First, you compete with yourself and your psyche, of course, you also compete with the market in the same way that a surfer competes with the ocean. That is reading the changes in the swell and the wind in order to pick to the right waves. However, you are also competing with other traders, because in forex for every winner there is a loser, and to make money, you need to try to ensure that other traders and not you are on the losing side, more often than not. To succeed, we need to follow a rules-based trading strategy that helps us back only the best trading opportunities that the market presents to us. We also need to try and develop an edge over our competition, that is other traders.

Of course, we don’t and can’t know who these other traders are, and even if we did it wouldn’t do us much good, because there are millions of them spread out across the globe trading away at any one time. However, the fact that there are so many competitors out there can work in our favour. Why? Because a crowd that big leaves a trail that we can follow and that can provide us with an edge.


Tracking the markets thinking

One of the methods that we can use to gauge what the rest of the market is thinking and doing is to look at what they are buying, selling and saying. That is measuring the sentiment towards the markets, and doing that in aggregate.

 

There are several ways in which we can do this. For example, we could study the weekly Commitment of Traders reports that are produced by the US CFTC which track changes in positioning in listed futures contracts (including FX majors) among key investor and trading groups. However, these reports are released three days in arrears, late on Friday afternoon in the USA. What’s more, they are not exactly user friendly in terms of their layout or the way that the data is presented or in the ease of interpretation (the CFTC is not known for its beautiful charts!).

 

Perhaps a more simplistic way to track trader sentiment is to look at what’s happening to the prices of safe-haven assets such as gold, the Japanese yen and Swiss franc and government bonds. If these instruments are rising in price, then that’s a sign of Risk-Off sentiment among traders.

 

If those safe-haven assets are strengthening when risk assets such as equities and Emerging Market currencies like the South African rand, Brazilian real and Turkish lira etc. are weakening, then you will know it’s risk-off. Of course, if we see risk assets appreciating while safe-havens are falling in price, that’s an indicator of Risk-On sentiment among market participants.

 

However, there are quite a few items to monitor the strategy outlined above. Since we are trying to gauge the aggregate sentiment of the crowd, it would be good if we had an indicator to gauge sentiment across a wide range of assets as well.

 

True we could try to use the VIX and other volatility indices, volatility is a measure of the rate and severity of price changes within an instrument or market. It tends to rise sharply as markets become fearful and trend lower when fear subsides and greed re-asserts itself. But once again, this would mean monitoring multiple items from different sources, to which we may have varying degrees of access.


A single gauge of sentiment?

Instead, what if we had one indicator that could tell us what others in the markets were thinking?

 

Fusion Markets has partnered up with some very talented engineers to simplify this even further.

 

Using cutting-edge artificial intelligence techniques known as Natural Language Processing (NLP), we can use machines to take in hundreds of thousands of data points across the web to gauge sentiment.

 

Are people talking about the Aussie dollar? What are they saying exactly? Are they positive or negative?

 

What about Gold? Is the crowd bullish or bearish?

 

To do this, yourself (e.g. scour hundreds of thousands of sources across the web) would be impossible. That’s why we always say there’s never been a more exciting time to be a trader (at least with Fusion anyway) and have these tools available that were previously only available to the world’s best hedge funds and asset managers.

 

We’ll leave it to you as to whether or not the crowd thinking it is highly bullish is a good signal to trade or a bad one and the strategy here (if you’ve read our views previously, you will know the answer!). Still, while it is not the holy grail as a single strategy, we believe this is a handy weapon to add to your arsenal to get an edge over others.


To start using our Sentiment tool now, create a Fusion account (it's free and there's no obligation to trade).

Sentiment Tools Trading Tools Market Forex Trading Tips Trend Analysis

We’ll never share your email with third-parties. Opt-out anytime.

Relevant articles

Trading and Brokerage
post image main
The Hidden Forces Driving Price Movements

Read Time: 5 minutes

 

There are true complexities that drive price movements in the forex market. Beneath the surface of visible price changes lies the market’s microstructure; an intricate web of factors influencing how prices fluctuate.  


Market microstructure focuses on the mechanics of trading, the behaviour of participants, and their involvement in the fluctuations of price. Understanding these hidden forces gives traders a clearer picture of market behaviour, equipping them to make more informed decisions in a competitive and chaotic environment.




Components of Forex Market Microstructure




Order Flow Trading


Order flow is the net volume of buy and sell orders in the market and plays a major role in shaping price movements. Increased buying pressure can push prices up, whilst selling pressure often leads to declines. By analysing order flow, traders can gauge momentum and anticipate short-term price shifts.



Bid-Ask Spreads


The difference between the bid (buy) and ask (sell) prices reflects market liquidity and can vary depending on trading volume and volatility. Wider spreads generally indicate lower liquidity or heightened risk, while narrower spreads signal a more stable and liquid market. Monitoring bid-ask spreads helps traders assess market conditions and transaction costs.



Market Depth and Forex Liquidity


Market depth refers to the volume of buy and sell orders at various price levels, offering insights into forex liquidity. High market depth indicates robust liquidity, making it easier to execute large trades without impacting prices. Shallow depth, however, can lead to higher volatility, as fewer orders can cause rapid price changes.



Market Participants


The forex market comprises of various participants, including;

  • Governments
  • Banks – Central & Commercial
  • Hedge funds & Investment portfolios
  • Corporations
  • Institutional Traders
  • Retail traders



undefined



Large players such as banks and hedge funds have a significant influence on price movements due to their transaction volume. In contrast, retail traders have less influence individually but can impact markets in aggregate, particularly in lower liquidity situations.



Price Discovery Process


Price discovery is the process by which the forex market determines the price of a currency pair. This process is heavily influenced by information asymmetry, where certain participants have more information than others, often leading to advantages in trading. For instance, institutional traders may have access to economic forecasts before retail traders, potentially moving prices before the data reaches the wider market.


High-frequency trading (HFT) has also become a significant part of price discovery. HFT involves executing trades at extremely high speeds, often driven by algorithms designed to capitalise on minute price discrepancies. While HFT can add liquidity, it can also cause rapid price changes that impact the price discovery process.



Liquidity Providers and Market Makers


Liquidity providers, such as banks and large financial institutions, ensure the forex market operates smoothly by offering to buy or sell at quoted prices, maintaining liquidity.


Market makers are liquidity providers who actively facilitate trades by setting bid and ask prices. By adjusting these prices, market makers can influence short-term price movements, especially in low-liquidity situations.


Market makers operate through both electronic trading and voice trading channels.


  • Electronic trading, facilitated by platforms and algorithms, is known for its speed and efficiency.

  • Voice trading, on the other hand, is often reserved for complex or large orders requiring negotiation, allowing for nuanced price adjustments in response to changing market conditions.



Order Types and Their Impact


The type of order a trader places can affect market dynamics significantly:


  • Limit Orders: These are orders to buy or sell at a specified price or better. They contribute to market depth and can create temporary support and resistance levels, as these orders accumulate in the order book.

  • Market Orders: Executed immediately at the current price, market orders can trigger rapid price shifts, especially if large orders are placed in low-liquidity periods. Market orders are often used to enter or exit positions quickly but may lead to slippage.

  • Stop Orders: These orders, triggered when prices reach a specified level, can amplify market moves as clusters of stop orders trigger simultaneously. This is common in trending markets, where stop-loss orders cascade as prices rise or fall.

  • Hidden and Iceberg Orders: Hidden orders are not visible in the order book and are typically large institutional orders that aim to reduce market impact. Iceberg orders reveal only a portion of the total order, with the remainder hidden until the visible part is filled.


A diagram of a graph Description automatically generated with medium confidence



Microstructure Anomalies and Opportunities


Understanding market microstructure can help traders identify unique trading opportunities:


  • Flash Crashes and Liquidity Holes: Flash crashes occur when liquidity temporarily dries up, causing sharp, rapid price declines. Such anomalies are often triggered by HFT algorithms or large, sudden orders in thin markets, such as the Asia session. Identifying potential liquidity holes can help traders avoid losses in volatile moments.

  • Arbitrage Opportunities: Discrepancies in currency prices across different platforms or regions can lead to arbitrage opportunities. While these are usually short-lived, microstructure knowledge can help traders identify and act on price inefficiencies quickly.

  • Leveraging Microstructure Knowledge: Advanced traders can use microstructure insights to make informed decisions, such as placing orders at levels where hidden liquidity or large stop orders might exist. This allows them to anticipate moves driven by institutional activity or market maker adjustments.



Conclusion


Forex market microstructure highlights the true forces that drive price movements, from order flow trading and market depth to the impact of different participants. For traders, understanding these components is crucial to being successful in the forex market. By analysing and having a thorough understanding of microstructure, you can gain a competitive edge, interpreting price action in real-time and making more strategic decisions.


As the forex market continues to evolve, staying updated on microstructure concepts and integrating them into trading strategies can lead to a deeper understanding of market behaviour. This knowledge can enable you to adapt and succeed over the long-term.


Trade with us today!

12/11/2024
Trading and Brokerage
post image main
Index CFD Dividends | Week 18/11/24

Read time: 3 minutes.


Please see the table below for any upcoming dividend adjustments on indices for the week starting November 18th, 2024.



FM Dividends 18/11/24

* Please note these figures are quoted in the index point amount

 



What is a dividend?


Dividends are a portion of company earnings given to shareholders. As indices are often composed of individual shares, an index dividend pays out based on individual shares proportional to the index’s weighting.


Trading on a CFD Index does not create any ownership of the underlying stocks, or an entitlement to receive the actual dividends from these companies.

 

What is an ex-dividend date?


An ex-dividend date is the cut-off date a share must be owned in order to receive a dividend. If an investor buys a share after the ex-dividend date, then they will not be entitled to earn or pay the next round of dividends. This is usually one business day before the dividend.

 

Do dividends affect my position?


Share prices should theoretically fall by the amount of the dividend. If the company has paid the dividend with cash, then there is less cash on the balance sheet, so in theory, the company should be valued lower (by the amount of the dividend).


Due to the corresponding price movement of the stock index when the ex-dividend date is reached, Fusion must provide a 'dividend' adjustment to ensure that no trader is positively or negatively impacted by the ex-dividend event.

 

How will the dividend appear on my account?


The dividend will appear as a cash adjustment on your account. If your base currency is different from the currency the dividend is paid out in, then it will be converted at the live FX rate to your base currency.

 

Why was I charged a dividend?


Depending on your position, given you are holding your position before the ex-dividend date, you will either be paid or charged the amount based on the dividend. Traders shorting an index will pay the dividend, whereas traders who are long the index will be paid the dividend.

 

Why didn’t I receive my dividend?


You may not have received a dividend for a number of reasons:


- You entered your position after the ex-dividend date

- You are trading an index without dividend payments

- You are short an index


If you believe the reasons above do not apply to your position, please reach out to our support team at [email protected] and we’ll investigate further for you.




01/11/2024
Ready to Start Trading?
Get started live or get a free demo
GET A LIVE ACCOUNT OR TRY A FREE DEMO