Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes

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c02 JWBK195-Saettele May 31, 2008 11:19 Printer: Yet to come

10 SENTIMENT IN THE FOREX MARKET

for good reason. The herd mentality is essential to survival. Something as

general as “fitting in,” whether child or adult (usually learned in childhood),

is a general example of following the crowd. This includes talking, acting,

or dressing in a certain way in order to be accepted and become part of

society. One could argue, however, that criminals fail to follow the crowd

in some respects and as a result fail to become part of society. It could

be argued that the rejection of conventional approaches such as going to

school, getting a job, and so forth, results in neglect from society, which

leads to criminal life. Most would agree that following the crowd as it is

presented in these examples is paramount to success in life.

The opposite is true when considering financial speculation (currency

trading, in this case). The conventional approach (the approach that the

crowd follows), which relies on studying economic indicators in order to

trade the FX market, does not work in my opinion. One look at a chart

disproves the myth that a positive correlation exists between economic

indicators and currency values over any meaningful time period.

More than 90 percent of all currency trades involve the U.S. dollar;

therefore, consistent correlations should exist between the greenback ...