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

P1:a/b P2:c/d QC:e/f T1:g

c05 JWBK195-Saettele May 31, 2008 11:54 Printer: Yet to come

CHAPTER 5

Sentiment

Indicators

T

he charts in Chapter 2 of various economic indicators plotted with

the USD Index (DXY) show that there is absolutely no relationship

between any one economic indicator and the U.S. dollar.

Critics will argue that you cannot use just one economic indicator.

They will say that you have to look at a number of indicators and under-

stand the big picture. The problem with this approach is that most eco-

nomic indicators are positively correlated; they move together (go back to

Chapter 2 and take a look at those indicators again). So even though accu-

rately forecasting one economic number with another economic number

might be possible, accurately forecasting the direction of a currency with

an economic number is not possible.

Others will argue that economic numbers do play a role but that a

host of other variables are also important, such as war, the price of com-

modities (oil or gold, for example), and Black Swan events as described by

Nassim Taleb in The Black Swan: The Impact of the Highly Improbable.

1

According to Taleb, a Black Swan is an unpredictable event that has an

enormous impact on society, such as the September 11, 2001, terrorist at-

tacks or the success of Google. Many traders believe that a combination of

different variables is responsible for market movements, and I think ...