Advance Sentiment Oscillator

The Average Sentiment Oscillator was invented by unknown Forex enthusiasts to gauge the overall market sentiment for a particular currency pair. It was officially used in the market in the early 2000s.

What is the Average Sentiment Oscillator?

The Average Sentiment Oscillator is a popular technical indicator used in Forex trading to measure the overall market sentiment for a particular currency pair. It is used by traders to determine the general mood of the market, designed to gauge the bullish or bearish sentiment within a given period of candles (i.e., price data for a specified time interval). It uses two algorithms that analyze the bullish/bearishness of each bar using the Open, High, Low, and Close (OHLC) prices and average these percentages to determine the final sentiment value. The two algorithms can be used separately or combined, offering both accurate intra-bar sentiment analysis and a smoother result that considers the range of price movement.

Advance Sentiment Oscillator - MT4
Advance Sentiment Oscillator – MT4

Key Features of the Average Sentiment Oscillator

  • The Average Sentiment Oscillator is based on data collected from multiple sources including traders, analysts, and market commentators.
  • The indicator provides an objective measure of market sentiment by aggregating opinions from a variety of sources.
  • It is a useful tool for traders to gauge market sentiment, as it can provide insight into the collective outlook of the market, which can be an important factor in determining the direction of a currency pair.

How to Interpret the Average Sentiment Oscillator

The blue line represents the Bull percentage, and the red line represents the Bear percentage. Both lines are 100% and reflect each other, with the higher line indicating the dominant sentiment. When the lines cross the 50% midline, it signals a change in power between bulls and bears, which is often a good time to buy or sell. The entries are more reliable when the average volume is high. The relative strength of trends can also be determined by comparing peaks in the blue and red lines. A clear divergence can be seen when the second bullish peak shows weaker strength on the oscillator but higher on the price chart. The oscillator can also be used for determining overbought/oversold levels by setting levels at 70% and 30%, similar to a Stochastic or RSI. A shorter period provides more leading signals, while a longer period results in fewer false signals. The minimum and maximum values can be adjusted to 20 and 80 to increase the width of the oscillator, and either of the lines can be hidden in the settings.

Average Sentiment Oscillator Strategy

Buy Signal

The Average Sentiment Oscillator sends a buy signal when the market sentiment for a particular currency pair is bullish. Traders interpret a reading above 50 as a signal to buy the currency pair, as it suggests that the market is optimistic about its future price direction.

  • The bullish crossover is depicted by the indicator curves.
  • The gap between the curves increases.
  • The solid bullish candle forms when the price bar closes.
  • Purchase is initiated when the aforementioned conditions are satisfied.
  • The stop loss is placed below the low of the bullish candle in question.
  • The long position is exited/profit is taken when the indicator shows a crossover in the opposite direction.
Advance Sentiment Oscillator Buy Signal
Advance Sentiment Oscillator Buy Signal

Sell Signal

Traders view a reading below 50 on the Average Sentiment Oscillator as a bearish market sentiment for a specific currency pair and interpret it as a signal to sell the pair. This is because a below 50 reading indicates a pessimistic outlook on its future price direction.

  • The bearish crossover is represented by the indicator curves.
  • The separation between the curves expands.
  • The price bar closes as a sturdy bearish candle simultaneously.
  • The sale is activated when the conditions mentioned above are fulfilled.
  • The stop loss is positioned above the high of the bearish candle in question.
  • The short position is exited/profit is realized when the indicator displays a crossover in the opposite direction.
Advance Sentiment Oscillator Sell Signal
Advance Sentiment Oscillator Sell Signal

Average Sentiment Oscillator Pros & Cons

Pros

  • The Average Sentiment Oscillator provides a clear and concise measure of market sentiment.
  • It aggregates opinions from multiple sources, providing a more comprehensive view of the market.
  • The oscillator can be used in conjunction with other technical indicators to improve the accuracy of trading decisions.

Cons

  • The Average Sentiment Oscillator is based on subjective opinions and can be influenced by individual biases.
  • It does not take into account fundamental data such as economic indicators and news events, which can have a significant impact on currency prices.
  • The oscillator can be prone to false signals, particularly during volatile market conditions.

Conclusion

The Average Sentiment Oscillator is a tool used in Forex trading to assess the general market sentiment for a particular currency pair. It takes into account the opinions of various sources such as traders, analysts, and market commentators to provide an impartial evaluation of market sentiment. The Oscillator is based on two algorithms that evaluate the bullish/bearishness of each price data using the OHLC prices, which are then averaged to give the final sentiment value. If the market sentiment is bullish, the indicator gives a buy signal and a reading above 50 is considered a signal to buy the currency pair.

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