Earlier, we said that price should theoretically accurately reflect all available market information. Unfortunately for us traders, it isn’t that simple. The markets do not simply reflect all the information out there because traders will all just act the same way. Of course, that isn’t how things work.
Each trader has his or her own opinion of why the market is acting the way it does. The market is just like Facebook – it’s a complex network made up of individuals who want to spam our news feeds.
Kidding aside, the market basically represents what all traders – you, Pipcrawler, Celine from the donut shop – feel about the market. Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market.
The problem is that as traders, no matter how strongly you feel about a certain trade, you can’t move the markets in your favor (unless you’re one of the GSs – George Soros or Goldman Sachs!). Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it.
As a trader, you have to take all this into consideration. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish. Ultimately, it’s also up to you to find out how you want to incorporate market sentiment into your trading strategy. If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss!
Being able to gauge market sentiment can be an important tool in your toolbox. Later on in school, we’ll teach you how to analyze market sentiment and use it to your advantage like Jedi mind tricks.