What is market sentiment?
Market sentiment can is the attitude or general opinion of the market. If the US Dollar is being sold day after day, market sentiment is dollar negative. You would want to look for opportunities to enter short trades on the dollar.
Trading with market sentiment
In general, you want to stick with trading on the same side as market sentiment. This is called "trading with the herd". You don't want to trade against the trends in forex unless you are an expert and have developed a proven method for trading against the trend. Trading against the trend will be disastrous for you unless you have specialized experience.
Market sentiment extremes
Market sentiment will eventually come to a point where the entire market is "on the train". This means that the majority of traders are done trying to pick the turning point and they decide to finally trade with the trend. This is usually where the turning point will occur in a currency pair. This is not an exact science, but there is a reasoning for it that explains it.
Once all traders get in line and trade in the same direction, there comes a point of exhaustion. The point of exhaustion is when there are literally no traders left to continue the trend because everyone is all in. This is the point where the currency pair will start to flip and reverse directions.
Once the currency flips directions, traders will once again try to enter more trades trying to trade that same trend that is now changed and they will continue to try to trade that original trend. Most traders will get deeper and deeper into the red until they finally decide that the trend is changed and flip directions.
No matter what your strategy, it's important to have a handle on what the current market sentiment is while you're placing your trades. Going against market sentiment at the wrong time could be very costly to your trading account.