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

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CHAPTER 3

The Power of

Magazine Covers

Y

ou are probably asking yourself, “What is a chapter on magazine cov-

ers doing in a book about currency trading?” Magazine covers are

one of the best indicators of mass psychology and, by extension, one

of the best signals that a market is close to forming a significant top or

bottom. Markets, like life in general, are not linear. Markets change di-

rection and bullish (optimism) for a top and bearish (pessimism) for a

bottom—extreme sentiment—is required to effect that change. A major

magazine would not devote its cover story to a financial market unless

the story in question was considered newsworthy. A story (especially one

about the value of a currency) is not considered newsworthy to a major

magazine unless the public is obsessed with the story, and an obsessed

public defines extreme sentiment. Since sentiment extremes accompany

market turns, by association, major magazine covers are contrarian indica-

tors and signal market turns.

The idea that magazine covers can be used as contrarian indicators in

financial markets is not new. Paul Montgomery of Universal Economics

has studied the covers of major news magazines for years and found that

when a magazine’s cover takes a directional stand on the stock market, that

market usually forms a significant top (if the cover is ...