Sentiment Indicator - this is a graphical or digital indicator, which helps to determine the opinion of a group of people concerning the market condition. If we are talking about sentiment indicators in connection with financial markets, then we have to note that they show the general sentiment, or as often said, positioning of market participants in relation to the movement behaviour of the analysed instrument.
The most important question is: what practical benefits can be gained by having an opportunity to assess market sentiments? If you learn to correctly assess the level of market optimism and pessimism, this can be a good earning. For example, when the market is dominated by a bullish sentiment, it means that most of the participants are in long positions, because they believe that the price will continue to grow. Accordingly, when a bearish sentiment prevails, it means that the majority of market participants are in short positions, because they believe that the price will continue to fall. However, as you know, everything has its own limit, so the situation in the market is impossible when all players are buyers or sellers, and everyone earns. At the first signs of an extremely bullish or extremely bearish sentiment, a trader should think about protecting the unrealized profit and, possibly, opening a position in the hope of changing the trend. Key market reversals tend to occur at times when most market participants (60% or more) are bullish or bearish. In other words, at the moment when the vast majority of traders start to believe in the strength of a trend and join it, it is at that moment that a cunning turn comes. On the other hand, most of the time the market is in a state of consolidation, or a weak bull or bear trend. In such market situations it is better to refrain from trading altogether.
Therefore, in order to understand what impact the market can have on the financial instrument that you are trading, you need to determine the general sentiment of the market. In technical trading, the main principle is to study what market participants are doing, and not what they say and think. With what means can you measure the market sentiment? First of all, it should be noted that the Forex market is a decentralized market, therefore it is impossible to create a universal indicator reflecting the sentiments and opinions of all Forex market participants, as there is no accurate and reliable information on the total number and volumes of trades in this market. However, a large broker, whose services are used by several tens of thousands of traders, it is possible to offer an indicator based on information on the status of open positions and pending orders within the company. A great example is AMarkets, whose traders are quite enough to determine the situation prevailing in the market as objectively as possible.
AMarkets offers traders a unique development - Cayman, whose goal is to identify potential market extremes, foretelling the beginning of the breakdown of the trend movement. It looks like this:
The bottom graph is the Cayman indicator itself. The upper one is the price chart.
How is Cayman Indicator used?
The sentiment indicator shows what percentage of traders is buying and selling a currency, i.e, who is dominating the market. Cayman allows you to stay on the opposite side of the market crowd, since nobody has yet changed the rule - if you want profitable trades, then stay on the minority.
It has fixed interval from 0 to 100. If the volume of buys for a certain currency pair increases, this means that the majority of the market participants are buying the currency. If the volume of sales increases, then the bid i made for correction.
The market sentiment indicator has its critical values referred to as extremes. it is very important to note that critical levels for different currency pairs are different. If a currency pair was unfolded in the past when the number of long positions reached 65% level, it is unlikely that is its critical level, and the signal must be monitored for a possible reversal when it reaches it. If another currency pair was unfolded only when the number of long positions reached the 90% level, then the reversal signals should be monitored exactly when this level is reached.
For example, for the EURUSD pair, the critical levels are the Cayman levels 30 and 70. If the percentage of orders opened in one direction reaches critical values, this can be regarded as a powerful signal not only for the trend slowdown and the overdue correction, but also for the probability of a trend change.
Levels 30 and 70 show overbought or oversold markets. If Cayman enters the zone from 0 to 30, it is implied that the currency pair has entered the oversold zone - we are waiting for the pair to turn upwards. If Cayman was in the zone from 70 to 100, then the currency pair is in the overbought zone - it's time to get ready to move down.
In the screenshot above, you can see how the Cayman indicator for the EURUSD pair reaches the overbought zone for a short period of time, signaling a high probability of the Euro's price collapse. This is exactly what happened: during the whole month, when Cayman arrived in the zone from 70 to 100, demonstrating the majority's opinion that the European currency will grow, the quotations were steadily declining. As a result, those who used the signals of this indicator could earn 400 points of profit.
Of course, the fact that the mood indicator reaches its extreme value does not at all mean that the trader should immediately start looking for opportunities for buying or selling. Cayman should be considered as an auxiliary tool, indicating the preferred direction of the transaction. It should also be noted that indicators / indicators of market segment are most effective on daily charts and larger time frames.