In this Wiki, we will take a look at Positioning Yourself with Medium Term Sentiment and how you can apply that to your trading.
This Wiki is part of our Fundamental and Sentiment Trading Strategies. Be sure to check that out HERE.
Positioning Yourself with Medium Term Sentiment
Positioning yourself with medium-term sentiment is basically using any reason that we could have to hold a position over a period of one to a few weeks. A classic example of this is when we have an upcoming event that the market is hotly debating and really excited about.
If we imagine that there has been an article written by a respected FED watcher that indicates that the FED may be about to cut interest rates at their next meeting and the reason he has given makes sense and matches up with the recent data pretty well. If the market has taken this seriously it will very quickly appear as a headline in most of the major news feeds and will gain traction as a market moving story.
In cases like this what will tend to happen is that the currency will move in line with what the FED watcher said right up until the next meeting as outlined in the article. The caveat is that the market must believe this information and the more traction the story gets in the news the more likely that the market is to trade it.
This is just a simple example but there are many other things that can sway short and medium-term sentiment in the Forex market. This can be anything from a global financial crisis, a military conflict between major nations causing safe haven flows, to something like a set of data points causing economists to downgrade their assessment of an economy and calling for the central bank to act. The point is that we have some very solid reasons that the rest of the market is also paying attention to.
Remember, in order for us to make money on our trades we need the price to move in our direction after we have entered and this requires the rest of the markets to be on board with that trade. We don’t want to be the only person looking at a piece of information and doing so will not give us an edge. We need the large players to be in the same trade so that we can take advantage of them pushing price in our direction.
A good way to get trade ideas for medium-term sentiment is following the news feeds and looking out for trade alerts from major investment banks, brokers, or analysts because they almost always trade medium term sentiment. This type of trading allows plenty of time for analysis and trade entry but does require larger stop losses than for day trading which could potentially be 100% or greater of the average daily range for the pair. At the same time, it can be a much less stressful way of trading that stops you from getting sucked into the intraday noise associated with scalping or short term trading.
Trading medium term moves requires a lot of discipline because if you are going to be sitting at your desk anyways then this has the potential of getting in the way of you objectively monitoring the overall picture and could potentially impact your performance. It’s worth thinking this through before trying to integrate medium term sentiment into your regular trading.
As you have probably guessed, this type of strategy does not require too much technical analysis for your entries, stops, and targets as these can all be based on bigger picture items that we will look at next.