Should you follow Trader’s Sentiment?

In this weekly video:
00:24 – Trader’s question from Norway
00:41 – Sentiment is hard to measure in the FX market
01:42 – Do you follow other traders?
02:04 – Why I use price action
02:50 – Trading against the sentiment
03:50 – Continuation patterns
04:39 – Send me your trading questions

Should you follow sentiment from other traders when making your trading decisions? Let's talk about that and more right now.

Hey, traders. It's Andrew Mitchem here from the The Forex Trading Coach with video and podcast number 306.

Trader’s question from Norway

Now I've received an email just this morning from a trader called Simon over in Norway. Simon said, “Hey Andrew, love your podcast, but can you chat about sentiment on a future podcast? Should we be following traders or should we go against them?”

Sentiment is hard to measure in the FX market

Simon, it's a really interesting question, because sentiment is quite difficult to measure in the Forex market. It depends where you get your information from. Are you looking at different websites? Are you looking at something like Reuters possibly? Are you looking at something like Forex Factory or FXStreet? They all show where traders are long or short on different currencies and where people are placing their positions right now. The problem is is they can only show the data that they can measure, so it's not uniform. It's not the same depending on where you get that data source from.

When you think about it, in the Forex market, it's very difficult to measure, a little bit like volume. Go and have a look at the volume indicator on, say, your broker's platform, and then open up a different broker. The volume levels that you see are vastly different, and I supposed it depends on where the broker gets their data from. Is it just from their traders? Is it from their entire price feed? Where does it come from? Sentiment, very, very similar, can be the same issue.

Do you follow other traders?

If you are simply just following other people or you think, “I'm just going to do the opposite,” because 95% of traders all lose, then it becomes quite dangerous in some ways. Although I like the idea, Simon, and I like what you're saying, I think there's a better way to do a similar type of thing.

Why I use price action

That's the way that I trade, which is why I use price action. You see, I'm looking at price action to give me an idea of where the big players in the market are moving the market, where they're placing their orders. That's why I also look at round numbers, like numbers, price levels ending in 00 or 50, because they're strong psychological levels. The price is likely to move up close to a 00 and then it's probably going to bounce back down again, or if it's heading back down to that level, it's going to bounce and then pull back again. A lot of orders are placed out, a lot of stop orders, a lot of stop losses, a lot of profit targets, et cetera, round numbers. So combining price action and candle formations with round numbers and support and resistance, et cetera, is the main part of how I trade.

But coming back to the sentiment question, if we were to say trade against the traders, the vast majority, that's kind of like I'm use as a reversal pattern. Just last week, on last week's video and podcast, I said, “Should you trade reversals or only continuations?” Reversals are going against the trend in some ways, but I only take a reversal signal once I have confirmation from the price action that the price is turning down. I'm not seeing the price going up and up and up and just simply taking sell crates just because I want to. I'm waiting for that price to go up and up and I'm looking for it to start to tip over, some indecision, some confirmation it's about to go the other way.

So Simon, to answer your question with the sentiment and trading against traders, yes, you can do that. Reversal patterns are very, very nice. They look really good. A slightly high risk, but they are good.

Continuation patterns

But personally, I would still want some form of confirmation to say, “Hey, this up trend's finished and now it's heading back down again.” Similar with the continuations. I don't just trade with the trend. So if a big uptrend going on, I'm not just taking buy trades, because at some stage, that's going to start to pull back or reverse. Rather than just jumping in with the money and just going with the direction, which is kind of what you talk about with sentiment and following traders, what I prefer to do is go and say, “Hey, here's a lovely up trend. Let's just wait to see when that pulls back or reverses.” If it pulls back and then I'll get the confirmation to go long again, that's what I call a continuation trade, and that's why I love continuations patterns, because as trading with that sentiment and with everybody else, but only after there's been a pull back, a bit of a rest in the market, and then it goes again. That, to me, becomes a safer option.

Send me your trading questions  

So Simon, I hope that helps. If you have any other questions, anybody else have any questions that you'd like me to talk about or discuss on future videos and podcasts, just send me an email [email protected] Have a wonderful week. I'll see you this time next week. Bye for now.

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