Sentiment is the overall mood of market participants: how bullish or bearish they are and how they are positioned. It matters because positioning creates fuel. When almost everyone is already long, there are few buyers left and many potential sellers.

Risk-on and risk-off

On risk-on days investors buy shares, commodity currencies (AUD, NZD, CAD) and higher-yielding assets. On risk-off days they buy the US dollar, Japanese yen, Swiss franc, gold and government bonds. Watching a few of these together tells you the day's mood quickly.

The Commitment of Traders report

Every Friday the US Commodity Futures Trading Commission publishes the COT report, showing positions held in futures markets, including currency futures, as of the previous Tuesday. Traders watch:

• Large speculators (funds): trend followers whose positioning shows the dominant view.
• Commercials (hedgers): businesses protecting real exposure, often positioned against the trend.

Extreme positioning, such as funds holding their largest long in years, warns that the trend may be crowded.

Contrarian thinking, used carefully

Sentiment extremes are a warning, not a timing signal. A crowded trade can stay crowded for weeks. Use sentiment to avoid joining a move late or to look harder for reversal signals, and use price structure to time the trade.