Behavioral economists believe that all price changes are influenced by the psychology of traders. Therefore, emotions can be the main driver of prices. Therefore, happiness and excitement, greed, optimism, pessimism, stress, worry, trust, etc. are the most important key factors in currency pricing. On the other hand, in fact**, market sentiment** shows the average of all sentiments at a given moment.
You must have heard what Warren Buffett said: buy when others are afraid and sell when others are greedy. A correct understanding of market sentiments can provide a clearer path for trading.
You can’t follow this term in Forex, since you (and me included) are a retailer; so if you try to open a trade when the institutional players are not interested, then surely you are going to lose your capital!
No but the underlying principals of discount and premium pricing still play a part in forex. Most retail traders fail to recognise this and buy in premiums and sell in discounts, just as they do investing in stocks and crypto.
It is important to understand that from a psychological point of view, this type of work is quite difficult, because it requires concentration and understanding of the essence of the work.
An understanding of how the market works will help a trader determine the direction they want to choose. Without analysing the market practice, it is impossible for anyone to tell whether the market is difficult or easy for them.
With time, a trader expands their knowledge and mental strength, thereby increasing the chances of their success.
I am not sure if the sentiments of retail traders can impact the forex market as a whole. Because the exchange rate of currencies are affected by many other factors like economical and political instabilities and more. Still, sometimes the market sentiments will also play a minor role in relation to forex.
Understanding trading psychology is critical since making profit in an ever-changing market environment would be tough without some emotional control. Market sentiment is all about risk; figuring out how to manage risk while controlling one’s own emotions as a trader is something that should be practised.