How to Identify the Market’s Sensitive Side

Many aspiring traders tend to view the market only through the “technical analysis” lens. We have written before on the advantages that incorporating a fundamental overlay can provide. But in this short article I’d like to offer a clear process that can help determine the market’s current sentiment – or what the “status quo” is – and hence what side of the market is the most “sensitive” side, the most vulnerable side.

To understand this concept, think of the market like a fellow trader – a human being. Markets are traded by humans, and by systems programmed by humans (for now at least), so the same behavioural traits that produced market movements in the 1970s remain true today.

Here are the steps to understand and exploit the “sensitive” side of the market:

a) identify current sentiment: what is the current market’s belief? What is the market “driven” by? What are the stories circulating in the financial media like Reuters, Bloomberg, etc.?

b) now that you have identified what the status quo is, you need to understand how the market is interpreting these drivers. All this takes is a glance at your charts. Is the market evidently moving somewhere? Or is it stuck in a range?

c) Now you know what’s driving the market and you have a gauge of the strength the drivers have. The next step is to incorporate emerging fundamental information: scheduled market movers, unscheduled events, geopolitical events, speeches. Ask yourself: is the event noteworthy? If it is, what is expected?

d) Once you have followed the steps above, you should be in a good place to identify what event or outcome would surprize the market the most. That’s where the opportunity lies: the market hates surprizes and will react the most when it is caught off guard.

Unexpected news, unexpected events, unexpected outcomes. The market is particularily sensitive to these surprizes. If you can learn to understand market sentiment, and uncover the “sensitive side”, your trading will never be the same for the better.

by | Apr 15, 2017 – 6.30 am

About the Author

Justin Paolini is a Forex trader and member of the team at  www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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