You've mastered the mechanics—strategy, risk, execution. Now discover the most powerful layer: Sentiment Analysis. While technicals show where price could go, sentiment reveals who's trapped and where the fuel is. Learn to trade with institutional flow, not against it.
Welcome to Lesson 69
You've mastered technical analysis, risk management, and strategy execution. You can identify Order Blocks, Fair Value Gaps, and Market Structure Shifts with precision. But there's a critical layer that separates consistently profitable traders from the rest: Market Sentiment Analysis.
Technical analysis tells you where price could go based on structure and patterns. Sentiment analysis tells you who is trading, what they're thinking, and most importantly—where they're vulnerable.
The forex market is a zero-sum game: for every winner, there must be a loser. To consistently accumulate profits, you need to know what the majority is doing so you can position yourself to benefit when they inevitably fail.
Professional Truth: Institutional money doesn't fight against retail traders—they feed on them. By understanding sentiment, you position yourself on the side that's eating, not being eaten.
This lesson introduces three advanced tools for gauging and exploiting market sentiment:
- COT (Commitment of Traders) Report — Track the smart money
- Retail Sentiment Indicators — See what the crowd is doing
- Liquidity Pool Hunting — Find where institutions hunt stops
Lesson Chapters
1Chapter 1: Why the Majority is Always Wrong⏱️ ~5 min
Market Sentiment is the general mood or feeling of market participants toward a particular currency pair. It's driven by crowd psychology, and historically, the crowd is almost always positioned incorrectly at major turning points.
The Institutional Mindset (The "Smart Money")
Institutional traders—banks, hedge funds, central banks—are the dominant players who actually move the market. They operate with massive order sizes (often $100M+ per trade) that require deep liquidity to fill.
The Problem: To fill a $100M sell order, institutions need $100M worth of buy orders from counterparties. Where do they find this liquidity?
The Answer: From retail traders who are:
- Highly leveraged
- Trading emotionally
- Following obvious patterns
- Clustered at predictable price levels
The Zero-Sum Reality
🎯 How Institutional Money Uses Retail Traders
The Cycle:
Retail Accumulation (The Setup)
- Retail traders see an "obvious" breakout pattern
- 75% of retail go long (buying) EUR/USD at 1.1000
- Their Stop Losses cluster below at 1.0970
- They're expecting continuation higher
Institutional Distribution (The Trap)
- Smart money sees the clustered retail positions
- They know there's massive liquidity (stops) at 1.0970
- They aggressively sell into retail buy orders
The Liquidity Sweep (The Execution)
- Price reverses, breaks below 1.0970
- All retail Stop Losses trigger (forced selling)
- This forced selling is the liquidity institutions need
- Institutions buy at 1.0960-1.0970 (accumulation)
The True Move (The Payout)
- After absorbing liquidity, price reverses up
- Institutions ride the trend they just engineered
- Retail traders are stopped out, watching from sidelines
- Institutions profit from retail pain
The Principle: Smart Money Strategy
Smart money often:
- Buys when retail sentiment is overwhelmingly bearish (selling)
- Sells when retail sentiment is overwhelmingly bullish (buying)
- Hunts obvious Stop Loss clusters for liquidity
- Uses retail extremes as entry opportunities
Your Goal: Identify extreme sentiment (large group positioned incorrectly) → Wait for institutional confirmation (MSS, OB) → Enter aligned with smart money flow.
Think like a whale: If you needed to buy $500M worth of EUR/USD, where would you find that many sellers? Answer: At a price level where retail traders are forced to sell (their Stop Losses). That's where institutions hunt.
2Chapter 2: The COT Report⏱️ ~8 min
The COT Report is a weekly publication by the U.S. Commodity Futures Trading Commission (CFTC) detailing the positions of major market participants in futures markets, including currency futures.
What is the COT Report?
Publication Schedule:
- Released every Friday at 3:30 PM EST
- Reflects positions as of Tuesday (3-day lag)
- Covers futures and options markets
Currency Futures Coverage: The COT tracks futures contracts that serve as proxies for spot forex pairs:
- EUR futures → EUR/USD
- GBP futures → GBP/USD
- JPY futures → USD/JPY
- AUD futures → AUD/USD
- CAD futures → USD/CAD
- CHF futures → USD/CHF
Key Categories to Track
The COT Report breaks down open interest into several categories:
📊 COT Report Categories Explained
Non-Commercials (Large Speculators)
- Who: Hedge funds, large trading firms, institutional speculators
- Goal: Profit from directional price moves
- Classification: Generally considered "Smart Money"
- What to Track: Their net positioning (long contracts - short contracts)
Commercials (Hedgers)
- Who: Corporations, banks, businesses using forex for hedging
- Goal: Protect against currency risk (not profit from speculation)
- Behavior: Usually positioned opposite to Large Speculators
- Example: Airlines hedging fuel costs, exporters hedging revenue
Non-Reportable (Small Traders / Retail)
- Who: Individual retail traders with small positions
- Classification: Often considered "Dumb Money" (contrarian indicator)
- Behavior: Typically wrong at extremes
What Matters Most: Focus on Non-Commercials (Large Speculators) for directional bias.
Reading the COT for Extremes
The most actionable signal from the COT Report is extreme net positioning.
🎯 COT Extreme Analysis
Example: EUR/USD Analysis
Current Data (from COT Report):
- Non-Commercial Long Contracts: 150,000
- Non-Commercial Short Contracts: 50,000
- Net Position: +100,000 (extremely bullish)
Historical Context:
- This is the highest net long position in 2 years
- Previous extremes at +90,000 preceded major reversals
What This Tells You:
The Crowd is All-In:
- Large speculators have placed the majority of their bullish bets
- Little buying power left to push EUR higher
- Market is overcrowded on the long side
Reversal Setup Forming:
- When everyone who wants to buy has already bought, who's left to buy?
- Answer: Nobody—so price must fall to find new buyers at lower levels
- This creates mean reversion opportunity
Your Action:
- Look for weekly/daily reversal signals
- Watch for Market Structure Shift to the downside
- Time entry on H4/H1 after MSS confirmation
- Enter short (sell) positions opposite the extreme
COT Trading Rules
Rule 1: High-Timeframe Confirmation Only
- COT is a weekly/daily indicator
- NOT for intraday M15/M5 entries
- Use it to set your macro bias
Rule 2: Wait for Technical Confirmation
- Extreme COT positioning alone is not an entry signal
- Must wait for Market Structure Shift
- Then enter on Order Block/FVG pullback
Rule 3: Combine with Price Action
- COT shows who is positioned where
- Technical analysis shows how price will move
- Together = high-probability setups
Example Integration:
| COT Signal | Technical Setup | Action |
|---|---|---|
| Extreme net short EUR | Weekly MSS up + Daily OB | Look for long entries |
| Extreme net long GBP | Weekly MSS down + Daily FVG | Look for short entries |
| Neutral positioning | No bias | Trade technicals only |
Key Insight: The COT Report shows you when smart money is reaching exhaustion levels. Your technical analysis shows you where and how to enter the reversal trade.
3Chapter 3: Retail Sentiment Indicators⏱️ ~7 min
While the COT Report shows big institutional money, Retail Sentiment Indicators show the positioning of smaller, less-informed retail traders.
How Retail Sentiment Works
These indicators (available from brokers and platforms like MyFXBook, DailyFX, OANDA) aggregate the open long vs. short positions of retail traders.
Example Display:
EUR/USD Retail Sentiment
Long: 78%
Short: 22%
What This Means:
- 78% of retail traders currently hold long (buy) positions
- This is an extreme bias (anything above 70% is actionable)
- These traders are vulnerable to a downside move
The Contrarian Rule
Professional traders view extreme retail sentiment as a contrarian indicator:
📉 Retail Sentiment Contrarian Strategy
The Logic:
Extreme Retail Long (75%+ Buying):
- Most retail traders are positioned long
- Their Stop Losses cluster below current price
- Price moving down will trigger mass liquidation
- This forced selling = liquidity for institutions to buy
- Professional bias: Look for selling opportunities
Extreme Retail Short (75%+ Selling):
- Most retail traders are positioned short
- Their Stop Losses cluster above current price
- Price moving up will trigger mass liquidation
- This forced buying = liquidity for institutions to sell
- Professional bias: Look for buying opportunities
Balanced Sentiment (45-55%):
- No extreme bias
- Not actionable
- Rely purely on technical analysis
Exploiting the Extreme: Real Example
Scenario:
- Pair: GBP/USD
- Retail Sentiment: 82% Long (extreme bullish bias)
- What This Means: Massive liquidity pool of stops below price
🎯 Real-World Retail Fade Trade
Step 1: Identify the Extreme
- Retail sentiment shows 82% long on GBP/USD
- Current price: 1.2700
- Retail stops likely clustered around 1.2650-1.2660
Step 2: Map Technical Levels
- Daily timeframe shows potential Order Block at 1.2750-1.2760
- H4 shows equal highs at 1.2755 (liquidity magnet)
Step 3: Wait for the Hunt
- Price rallies to 1.2760, sweeps the equal highs
- Triggers buy-stops above (adds to long positions)
- Retail traders feel validated ("we were right!")
Step 4: Watch for Reversal (MSS)
- After the sweep, price shows H1 Market Structure Shift down
- Breaks below 1.2730 swing low
- Creates fresh Bearish Order Block at 1.2755-1.2760
Step 5: Enter on Pullback
- Price pulls back to 1.2755 (into the OB)
- Entry: Sell at 1.2755
- Stop Loss: 1.2770 (above sweep high, 15 pips)
- Take Profit 1: 1.2650 (retail stop cluster, 105 pips)
- Risk-Reward: 1:7
Step 6: Execution
- Full 1% risk (this is a high-conviction setup)
- Account: $10,000 → Risk: $100
- Lot size: 0.67 lots (for 15-pip SL)
Outcome:
- Price drops to 1.2655 over next 18 hours
- 82% of retail traders get stopped out (forced selling)
- This selling pressure fuels the down move
- Your TP1 hits for +$700 profit (7R)
Why It Worked:
- ✅ Extreme retail sentiment provided directional bias
- ✅ Technical setup (sweep + MSS + OB) confirmed entry
- ✅ Retail stops provided the fuel for the move
- ✅ You traded with institutions, not against them
Professional traders don't feel sorry for retail losers—they become the liquidity providers that institutions need. This is the reality of markets. Your job is to be on the winning side.
Where to Find Retail Sentiment Data
Free Sources:
- DailyFX Sentiment (IG Group data)
- MyFXBook Sentiment (aggregated from multiple brokers)
- OANDA Order Book (their client positioning)
- Forex Factory Sentiment (community data)
How to Use:
- Check before your trading session
- Look for extremes (70%+ on one side)
- Use as confirmation for your technical setups
- Ignore when near 50/50 (no actionable bias)
4Chapter 4: Liquidity Pool Hunting⏱️ ~8 min
Liquidity Pool Hunting is the process of identifying areas on the price chart where Stop Loss orders and pending orders cluster. These areas act as magnets for institutional price movements.
What is a Liquidity Pool?
A Liquidity Pool (or Liquidity Cluster) is a concentration of Stop Loss and pending orders at a specific price level. These orders represent the fuel that institutions need to:
- Fill large position sizes
- Enter at favorable prices
- Engineer directional moves
Why Institutions Hunt Liquidity:
- They can't just "buy at market" with $100M orders
- Need massive counterparty volume
- Retail stops provide this volume
- Triggering stops creates momentum in their favor
Where Liquidity Clusters
🎯 Common Liquidity Pool Locations
Equal Highs/Lows (Double Tops/Bottoms)
- Most obvious technical pattern
- Retail traders place stops just beyond these levels
- Buy-stops above equal highs
- Sell-stops below equal lows
- Prime targets for liquidity sweeps
Major Swing Highs/Lows
- Recent extreme points on the chart
- Where most traders place protective stops
- The more obvious the swing, the larger the pool
- Often on round numbers (1.3000, 1.2500, etc.)
Range Boundaries (Consolidation Extremes)
- Above and below prolonged trading ranges
- Breakout traders place stops at these levels
- Range traders place stops beyond these boundaries
- Both groups get stopped when swept
Previous Day/Week High/Low
- Psychological levels traders watch
- Breakout pending orders cluster here
- Very common liquidity target during sessions
Round Number Levels
- 1.0000, 1.1000, 1.2000 (big figures)
- Psychological significance
- Retail tends to place stops at/near these levels
The Liquidity Sweep Mechanism
📈 Anatomy of a Liquidity Sweep
Stage 1: Accumulation Phase
- Price consolidates, forming equal highs at 1.0850
- Retail traders see "resistance" and place sell stops above
- Buy-stop orders from breakout traders also cluster above
- Liquidity pool forms at 1.0855-1.0860
Stage 2: The Hunt Begins
- Institutions need liquidity to enter large short positions
- They push price up toward the liquidity pool
- Creates bullish candles (looks like a breakout)
Stage 3: The Sweep (Liquidity Grab)
- Price spikes to 1.0862 (just above equal highs)
- Triggers all buy-stops (retail forced to buy at worst price)
- Triggers all sell-stops from those who shorted resistance
- Institutions fill their sell orders into this buying pressure
Stage 4: The Rejection (True Direction Revealed)
- Price immediately reverses (wick formation)
- Market Structure Shift to the downside
- Creates fresh Bearish Order Block at 1.0855-1.0862
- This was never a real breakout—it was a liquidity grab
Stage 5: The True Move
- Price drops 100+ pips over next hours/days
- Retail traders who bought the breakout are trapped
- Institutions profit from the directional move
- The sweep provided the fuel and the entry point
Professional Liquidity Hunt Execution
💼 Step-by-Step Integration
Step 1: Identify the Pool
- Mark obvious liquidity clusters on your charts
- Equal highs/lows are most common
- Label them: "BSL" (Buy-Side Liquidity) above highs, "SSL" (Sell-Side Liquidity) below lows
Step 2: Wait for the Sweep
- Watch for price to aggressively run toward the pool
- The move will often appear as a "breakout" or "breakdown"
- Look for a wick through the level (not a clean break)
Step 3: Confirm Market Structure Shift
- After the sweep, watch for MSS on lower timeframe (M15/H1)
- The reversal must break recent structure to confirm
- Without MSS, it might be a real breakout (not a sweep)
Step 4: Map the Entry (OB/FVG)
- The liquidity sweep creates new Order Blocks
- Fair Value Gaps often form during the rapid reversal
- These become your entry zones
Step 5: Execute the Trade
- Place limit order at the OB/FVG level
- Stop Loss beyond the sweep extreme (invalidation)
- Take Profit at next liquidity pool in opposite direction
- Full 1% risk (this is a high-probability setup)
Example Values:
- Liquidity sweep high: 1.0862
- Entry (OB): 1.0855
- Stop Loss: 1.0875 (above sweep + buffer, 20 pips)
- Take Profit: 1.0755 (SSL below equal lows, 100 pips)
- Risk-Reward: 1:5
The most obvious levels on the chart are the most dangerous to trade at face value. Equal highs/lows LOOK like support/resistance, but they're actually liquidity traps waiting to be swept. Trade the sweep, not the level.
5Chapter 5: Synthesizing for High Probability⏱️ ~5 min
Sentiment analysis is not a standalone trading signal—it's a confluence filter that dramatically raises your setup probability when aligned with technical analysis.
The Professional Integration Framework
🎯 Multi-Layer Analysis Framework
Layer 1: COT Analysis (Weekly Bias)
- Check COT every Friday
- Identify if Large Speculators at extreme positioning
- Set macro directional bias for the week
Layer 2: Retail Sentiment (Daily/H4 Bias)
- Check retail sentiment before each trading session
- Look for 70%+ extremes
- Set contrarian bias for the day
Layer 3: Liquidity Pools (H1/M15 Targets)
- Mark obvious stop clusters on intraday charts
- Watch for sweep attempts
- These become your TP levels and entry signals
Layer 4: Technical Execution (M15/H1)
- Wait for MSS after liquidity sweep
- Enter at OB/FVG mitigation
- Use standard 1% risk
- Let sentiment-backed setup work
Comprehensive Analysis Table
| Sentiment Tool | Timeframe Focus | What It Tells You | How To Use It |
|---|---|---|---|
| COT Report | Weekly / Daily | Macro crowding by large speculators | Bias filter: Look for trend exhaustion/reversal |
| Retail Sentiment | H4 / H1 | Small trader herding and positioning | Contrarian filter: Prefer trading opposite to extreme retail bias |
| Liquidity Pools | H1 / M15 | Exact stop clusters and pending orders | Entry map: Hunt sweep → MSS → OB/FVG entries |
The Confluence Multiplier Effect
Single Factor Trades:
- Technical setup alone: ~60% win rate
- Sentiment signal alone: Not tradeable
Two-Factor Confluence:
- Technical setup + COT extreme: ~65-70% win rate
- Technical setup + Retail extreme: ~65-70% win rate
Three-Factor Confluence:
- Technical setup + Retail extreme + Liquidity sweep: 70-75% win rate
- This is the professional edge
Professional Rule: Only take an SMC entry when technical requirements (MSS + OB/FVG) and at least one strong sentiment extreme (COT or Retail) align. This filters out 60% of marginal setups and concentrates risk on the highest-probability opportunities.
6Chapter 6: Summary, FAQs & Quiz⏱️ ~7 min
Summary & Conclusion
Advanced Market Sentiment Analysis is the key to trading alongside institutional flow rather than fighting against it.
Key Principles:
Key Principles (0/12)
Professional Mindset: Sentiment doesn't predict the future—it reveals who is positioned poorly and where the market will hunt for liquidity. When you align with institutional flow, you're not guessing direction—you're exploiting mathematical necessity.
Trade the math, manage the risk, and align yourself with the flow of capital—not the crowd.
FAQs
Q: How often is the COT Report released?
The COT Report is released every Friday at 3:30 PM EST, but the data reflects positions held as of the previous Tuesday (3-day lag).
Use it for weekly/daily bias setting, NOT for intraday decisions.
Where to Access:
- Official: CFTC.gov (free, raw data)
- User-Friendly: COTBase.com, MyFXBook COT, TradingView COT charts
Q: Should I always trade against the Retail Sentiment indicator?
No—only at extremes. Context matters.
When to Fade Retail (Contrarian):
- ✅ Extreme Bias (70%+ on one side)
- ✅ Combined with Technical Confirmation (MSS + OB/FVG)
When to Ignore Retail Sentiment:
- ❌ Balanced Sentiment (45-55%)
- ❌ During Strong Trends
Decision Framework:
| Retail Sentiment | Technical Setup | Action |
|---|---|---|
| 80% Long | MSS Down + Bearish OB | ✅ Strong SELL signal |
| 80% Short | MSS Up + Bullish OB | ✅ Strong BUY signal |
| 50/50 | MSS + OB/FVG | ✅ Trade technicals only |
| 75% Long | No MSS, no OB | ❌ Wait for confirmation |
Golden Rule: Sentiment provides the directional bias. Technical analysis provides the entry trigger. You need both to have a high-probability trade. Never trade sentiment alone.
Q: How does Liquidity Pool Hunting relate to Order Block Trading?
They are highly complementary—two sides of the same institutional strategy.
Liquidity Pool Hunting:
- Defines where price is likely to go (the target)
- Shows why price moves there (to grab stops)
Order Block Trading:
- Defines where to enter after the sweep (the entry)
- Shows where to place Stop Loss (invalidation)
Combined Strategy:
- Liquidity pool hunting identifies the target
- Wait for the sweep
- Order Block provides entry (at the swept level)
- Market Structure confirms
- Result: Maximum probability, optimal risk-reward
Quiz: Advanced Market Sentiment Analysis
The Commitment of Traders (COT) Report is primarily used to gauge the positioning of:
In sentiment analysis, a massive cluster of retail Stop Losses creates what is known as:
When a Retail Sentiment Indicator shows 80% of traders are Long (Buying) a pair, a professional trader typically:
Sentiment analysis is best used in a trading strategy as a:
Call to Action
🧭 Stop trading in the crowd. Start hunting with the institutions.
The difference between amateur and professional trading is seeing the game within the game. Price charts show moves. Sentiment analysis shows why those moves happen and who gets liquidated.
Your Next Steps:
- Bookmark a Retail Sentiment source — Check it before every trading session
- Set Friday COT reminder — Review Large Speculator positioning weekly
- Map liquidity pools — Mark equal highs/lows on your H1/M15 charts daily
- Wait for the sweep → MSS → mitigation sequence before entering
- Track sentiment-backed trades separately — Measure the probability improvement
Build your sentiment layer. Let the crowd be your fuel, not your guide.
Ready to Trade with Institutional Flow?
Practice sentiment analysis and liquidity hunting on a demo account. Learn to identify where institutions hunt stops and how to position yourself alongside smart money.
Deriv
- ✅Zero-spread accounts for tighter entries
- ✅Swap-free (Islamic) available
XM
- ✅Consistently low spreads on majors
- ✅Micro accounts — start with a smaller risk
- ✅Swap-free (Islamic) available
- ✅No trading commission
Remember: Markets move when large groups are positioned incorrectly. Your job is to identify those groups, wait for confirmation, then trade the liquidation. Sentiment reveals the victims. Technical analysis reveals the timing.
Trade against the crowd, with the flow, at the right price.
Ready to continue?
Mark this lesson as complete to track your progress.