A reasonably accurate evaluation of market sentiment can be an extremely valuable asset to a forex trader if the knowledge is used with caution.

Nevertheless, market sentiment is continuously changing, much like other human psychological characteristics routinely observed in the market.

As a result, the market price action will generally already have discounted whatever effects market sentiment may have had before a trader can take a position to profit from any sentiment changes as they occur.

Still, once a clear indication of market sentiment has been determined, a trader can then establish positions with appropriate stop-loss orders and attempt to determine the next overall shift in market sentiment to indicate when to close the position.

How Fundamental Indicators Influence Market Sentiment

Economic releases and current events make up the more traditional forms of fundamental analysis used to determine market sentiment. Market sentiment makes up a large psychological component of what drives the market.

Basically, If economic indicators for a particular country show a strengthening economy which surpasses that of other nations, by a growing Gross Domestic Product for example, this will tend to shift market sentiment positively in favor of that country's currency in relation to other currencies.

Furthermore, a negative change in market sentiment may result if economic numbers are released which would indicate that the strength in the economy was slowing down, or if consumer confidence begins to wane in the face of slowing economic conditions.

Business and Consumer Confidence Surveys

A number of economic releases presented in the form of surveys or indexes based on surveys hold an important place among the various forms of economic data that are periodically released.

A positive reading or change from these surveys can greatly improve market sentiment for that country's currency, while a disappointing reading or change can shift market sentiment negatively.

A number of consumer confidence surveys typically exist for most of the major countries that are released periodically to the public. Below you can find some of the more widely watched economic surveys and indicators listed along with the codes for the currencies that they impact:

• University of Michigan Consumer Sentiment - USD

• CB Consumer Confidence - USD

• Chicago Purchasing Managers Index - USD

• Consumer Confidence - EUR

• German Ifo Business Climate - EUR

• Sentix Investor Confidence - EUR

• ZEW Economic Sentiment - EUR

• GfK Consumer Confidence - EUR, GBP

• Nationwide Consumer Confidence - GBP

• Household Confidence - JPY

• NAB Business Confidence - AUD

• Westpac Consumer Sentiment - AUD

• Bank Of Canada Business Outlook Survey - CAD

• NZIER Business Confidence - NZD

The above list represents some of the most widely watched confidence and sentiment indicators for the economies of the major currency countries.

The results of each one of these indicators, released monthly in most cases, can help a fundamental analyst gauge one or more aspects of market sentiment in the respective countries.

Shifts in Market Sentiment

One of the most prominent features of market sentiment is how often it changes. Just one economic release can significantly affect market sentiment and this shift can immediately impact the currency markets as traders position themselves accordingly.

Reading market sentiment consist of a valuable tool for forex traders, and any abrupt change in market sentiment should be identified and appropriate action taken when trading affected positions.

Furthermore, shifts in market sentiment can occur intra-day since all it takes is one news story or one economic release to make currency rates reverse and start trading in the other direction.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.