Originally posted at forexfactory on March 15, 2011
Grkfx,You put it in writing better than what I could myself. So its exactly like what what you have said before.
The market has sentiment but price can easily be mis priced intra day or on any time frame and deviate from true value but eventually sentiment will kick in and bring it back to equilibrium or perhaps mis price it again.
It is up to the OF trader to recognize when price has diverged and take advantage of it. I guess its almost the same as a mean reversion. but to value and not some mathematical calculation.
It is up to trader to recognize if price has diverged from sentiment, and if, and then how to structure the trade properly to take advantage of it. Sometimes the order flow trader can make the determination that sentiment alone is not enough of a order flow generator to help support the trade and they pass on the opportunity.
Then they need to determine many others things like how fundamental value can play a role with sentiment. When sentiment can change in a split second and reverse completely, when sentiment can get even intensify even more.
Theres like a million different things to think about.
As for mean reversion. I don’t care what people call it. Whether they call it mean reversion or reversion to sentiment, or some mathematical formula. It’s all about order flow and what will generate order flow. If it doesn’t generate order flow, then what good are all the fancy mathematical formulas? I just care about what will move the market.